Abercrombie & Fitch (NYSE:ANF) showed signs that their fall to the bottom of the teen retail market was finally slowing, leaving investors wondering what's in store for this massive clothing retailer. Comforting share prices and a lower net loss than analysts had predicted could be lulling investors into a false sense of security. Are Abercrombie's results reason enough to buy shares, or should you get out before CEO Mike Jeffries opens his mouth again?
Jeffries instability as a leader came to light in 2013 after comments he made regarding Abercrombie & Fitch's target market in a 2006 interview made their way into the public eye creating a firestorm of negative attention causing their stock prices to plummet. This wasn't the first time Abercrombie & Fitch had faced public criticism under Jeffries' leadership. In 2010, they were added to International Labor Rights Forum's "Sweatshop Hall of Fame" and on numerous occasions, they've faced a host of boycotts stemming from their controversial t-shirts. His actions have caused irreparable harm to the brand at a time where operators in the teen retail space are facing increasingly difficult market conditions.
Beating low expectations
Abercrombie & Fitch reported revenue of $822 million in their first quarter, a loss of 2% over last year, but significantly less than analysts had expected due in part to 2013's PR gaffe, which didn't help slow the 30% drop in Abercrombie's stock value . Following the release of their first quarter earnings, Abercrombie & Fitch saw a 7% jump in pre-market share prices, which quickly reversed as the day went on. . Abercrombie & Fitch seems to be sitting pretty because they didn't do as badly as expected, but is this a trend we can expect to continue?
In a press release issued on May 29, Mike Jeffries, Abercrombie & Fitch CEO, pointed to operating in the difficult teen retail market as the source of falling revenues which can be corroborated by the dismal results of Abercrombie & Fitch's main competitors, American Eagle (NYSE:AEO) and Aeropostale (NASDAQOTH:AROPQ), both of which posted first quarter losses that exceeded Abercrombie & Fitches. Jay Schottenstein, interim CEO of American Eagle, and Tom Johnson, CEO of Aeropostale, echoed Jeffries sentiment in their first quarter earnings conference calls. Schottenstein and Johnson attributed their losses to weak sales in their brick and mortar operations, citing a shift in the buying patterns of teens and increasingly poor mall traffic as the root cause. Both companies are now making a shift toward an online sales model, a model with which Abercrombie & Fitch is already seeing growth.. This is important to note because investors need to understand that this sector is experiencing difficulties, there's no doubt about it. But Abercrombie & Fitch's decline can't fully be attributed to a shift in the market and with Jeffries at the helm, there's a chance that they can fall faster than their competitors. The market is pretty volatile right now, leaving little margin for errors, errors that Jeffries has made consistently throughout his tenure.
Stable leadership in unstable markets
You don't just invest in a company, you invest in it's leadership, especially when the company is facing unstable market conditions. Stakeholders need someone that can keep everything under control. Mike Jeffries hasn't shown himself to be that kind of leader. In December, Glenn W. Welling, Managing Member of Engaged Capital released a letter urging the company to push Jeffries out citing his "operational missteps" and "increasingly controversial reputation" as reasons to do so. Although Jeffries has stayed out of the public eye in recent months, it's clear that even major investors in Abercrombie & Fitch are proceeding cautiously. The poor results of their first quarter adds weight to their concern.
With a track record like his, one tarnished through many years of mismanagement, it would be unwise to place your bet on Jeffries, especially right now. The company is already taking a beating from the market and, if history is any indicator, their decline could be accelerated by the poor judgement of their CEO.
Buy or sell?
Richard Jaffe, an analyst from Stifel, suggests that you hold the stock but this may be based solely on their first quarter results and the mini-surge their stocks got from that release. Looking at Abercrombie & Fitch's management history, and the probability of Jeffries' continuing to make poor decisions that will drastically affect the stock price, Investors may want to consider selling it sooner than later. The teen apparel market is looking pretty weak and it's volatility could be exasperated by Jeffries' poor management and lack of self-control. We can revisit this recommendation if Jeffries is replaced as CEO.