On Thursday, when I took a look at Abercrombie & Fitch
That was then, this is now, and today, Abercrombie still faces some heavyweights in the retail arena -- names like Gap
Sure, Abercrombie's been firing on all cylinders so far. But this is the year Abercrombie is going to have to start butting up against much tougher comparisons than it did last year -- against the same very tough competition.
Never mind the inventory?
Abercrombie reported an impressive fourth quarter on Feb. 14, with profit rising a whopping 58% and sales up an incredible 40%. Same-store sales increased 28% -- again, an amazing number. Gross profit improved by 20 basis points to 66.5%, and that's something investors like to hear. However, Abercrombie did caution that in 2006, while its same-store sales will be positive, investors shouldn't expect the same levels of growth that it was able to manage last year.
Meanwhile, investors should keep a close eye on Abercrombie's inventories going forward -- a 72% increase in inventories from the same time last year gives some reason for concern. (Check out Rich Smith's Foolish Forecast, which outlined inventories as an area for investors to watch.) On a square-footage basis, inventory increased 59%, an improvement over last quarter. Abercrombie management said in its conference call that it remains "comfortable" with its inventory levels.
Investors might not want to get too comfortable, though. A 72% increase in inventories far outpaces Abercrombie's 38% sales growth for the year. And, of course, the fear that any Abercrombie investor should have is that the company will have to mark down its extra merchandise and its profitability will take a hit. Abercrombie's traditionally not big into markdowns; of course, there comes a point when that inventory needs to move.
Last but not least, Abercrombie did not include a cash flow statement; Fools, as a rule, prefer companies to release that financial statement with their earnings releases, as opposed to having to wait until the Form 10-Q is filed with the Securities and Exchange Commission later.
A not-so-golden Ruehl?
Much has been said about a possible catalyst on Abercrombie's horizon -- its new concept, Ruehl. It's understood that Ruehl, with only eight stores so far, could be a huge boon to Abercrombie's growth story if it goes over well with customers. The basic gist of Ruehl is that it targets customers who have outgrown Abercrombie's other stores; basically, it targets folks in the 25-to-35 age group. Ruehl sells high-priced goods -- some might argue overpriced, but I guess that's for the customers to decide.
However, in Abercrombie's fourth-quarter conference call, management said it is already making a strategic change to Ruehl. Company leaders said Ruehl didn't reflect "the casual sportswear trends" that are well known in Abercrombie's other concepts. "Given our understanding that trend transcends age, we have adjusted the assortment to reflect more casual trends," Mike Jefferies, Abercrombie's chairman and CEO, said.
I talked to several of my colleagues who follow Abercrombie and asked what they thought of the Ruehl developments. The ones who had visited Ruehl in person noted that it was already very casual; if the company meant to lure in an older clientele that needs to shop for work attire, then it was already missing the mark.
Now, granted, that's anecdotal, but the comments in the conference call and the above information make me wonder whether Ruehl won't be as differentiated from the other Abercrombie concepts as many investors might hope. My question is not only whether Ruehl isn't resonating well with customers so far, but also whether, if "trend transcends age," then why bother with Ruehl at all?
The customer base targeted by Ruehl has more money to spend than their younger counterparts do, but if it's about giving older Abercrombie shoppers a pricier place to shop, I'm wondering whether this is beginning to sound a little bit too much like the mistakes Gap has made. My fellow Foolish writer Seth Jayson recently observed what I think is a very good point: The wares at Old Navy, Gap, and Banana Republic are differentiated by little more than price tags on the clothes.
Tomorrow never knows
Regardless of where you stand on now-hot Abercrombie -- and here's a link to a recent Foolish Duel about the stock, which outlines more pros and cons for your consideration -- there is a lesson to learn by looking back over the years. Retail's a tough business, and in the course of writing these two articles, I came away with the sense that there are plenty of reasons to believe Abercrombie might very well be a risky bet at the moment, from an investing standpoint.
I don't believe that controversy and scandal (discussed in yesterday's piece) add up to a sustainable competitive advantage -- nor, in my opinion, does Abercrombie's attempt to create an aspirational brand for the so-called "beautiful people" who all look the same ... and sport the company logo.
Consider, too, that Abercrombie's got a tough act to follow in its recent financial comparisons. It also has the inventory issue and the historical cyclicality, which illustrates a tendency to run hot and cold. I'm sure many people would disagree with me, given that the company's been on such a tear, but this Fool thinks the future may not look so beautiful for Abercrombie.
For some related Foolish articles, please see the following:
- Here's our look at the Abercrombie of yesterday.
- Check out Rich Smith's Foolish Forecast.
- Fools dueled over Abercrombie not too long ago.
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