Parents tagging along with their teens while shopping at Abercrombie & Fitch (ANF) might want to tote flashlight, earplugs and nose plugs (you really can purchase nose plugs), as the company’s stores are dark, loud and very aromatic. Parents might also want to leave their wallet at home, as Abercrombie & Fitch’s product offerings are priced at a premium. And, if the teen is an aspiring model then he or she can complete a job application while in the store and maybe land a gig as one of the store’s models, as models for Abercrombie & Fitch are selected from the store’s employees.
I started writing this article yesterday, but ran out of time to post it yesterday. Wish I had, as Abercrombie released is third quarter sales results today , which had some negative comments. The company mentioned it is experiencing a slowing trend in Europe and experienced negative comparables for its flagship stores. The company also mentioned that its comparables for Japan and Canada continue to trend negative.
The company’s reported earnings weren’t terrible, but when a company with a pricey stock like Abercrombie’s with its P/E ratio of 33 reports even slightly bad news, the company’s stock price usually takes a hit. Abercrombie’s stock price is down 22% today and is near its previous support level, so hopefully the stock’s price will stabilize at this point and not continue to drop. A graph of the stock price is shown below:
(Click chart to expand)
Yesterday, before I ran out of time, I was going to discuss a potential collar position for Abercrombie with a maximum loss of 6.8% and a potential return of 2.2%. For those of you feeling the full 22% hit today, I apologize, and you might still consider entering a collar position for Abercrombie in case the company releases more bad news in its upcoming conference call.
I can’t remember a time when issues related to Europe have continually been on the front page of U.S. newspapers, as has happened as of late. With all that is going on in Europe related to sovereign debt, it's no surprise that Abercrombie is experiencing a slowdown with respect to its European stores. Abercrombie is kind of in a pickle right now with slow growth in Europe and with the company closing under performing stores in the U.S. The company indicated in its most recent conference call it is planning to close 60 to 65 mediocre performing U.S. stores this year when the leases for the stores expire, but indicated it is only planning to add 45 new stores in Europe, so if the company plans to continue to grow it must grow via its current stores, which is difficult to do quarter after quarter and year after year.
The company also indicated in its most recent conference call, that it expects to experience gross margin erosion over the back half of the year and cited double digit increases in the cost of its products as the reason for the expected margin erosion.
The company has some positives as it is repurchasing shares and has substantially eliminated all of its outstanding letters of credit.
Abercrombie also received some free publicity when it released a press release indicating the company was willing to compensate Mike “The Situation” Sorrentino of MTV’s “Jersey Shore” for not wearing its clothes. Sorrentino claims he never received the offer from Abercrombie.
Abercrombie plans to open a store in Mainland China later this year, and hopefully its strategy in China pans out, as it’s not looking too good for Abercrombie in the U.S., Europe, Canada, and Japan right now. It will be interesting to see if Abercrombie can sell its shirts for $80 in China like it does elsewhere.
For investors intent on sticking with Abercrombie & Fitch, a collar position might be considered. A collar position can be entered by selling a call option against an existing stock or a purchased stock and using some of the proceeds from selling the call option to purchase a put option for protection.
For example, using PowerOptions search capability, a collar position for Abercrombie was found with a potential return of 1.9% and a maximum loss of 7.8%. The time frame for realizing the potential return is 16 days. The call option to sell is the 2011 November 60 call and the put option to purchase is the 2011 November 52.50 put. If the price of the stock remains unchanged at expiration in November, the position will return 1.9% and as a bonus, if the price of ANF is greater than the strike price of the call option at expiration, the position will return 5.5%. A profit/loss graph for the collar position is shown below:
A nice perk of a collar position is that investors can continue to receive dividends via holding the long stock. And, as the price of ANF increases, the collar position can be managed for increasing potential return.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.