Seeking Alpha
Long/short equity, value, REITs, macro
Profile| Send Message|
( followers)  

Abercrombie & Fitch Co. (ANF) is a U.S. apparel retailer with some international sales. It has been a weak company for the last five years at least. The following financial summary table gives some of the relevant data.

(Click to enlarge)

The chart shows that Operating Income has been decreasing consistently for the last five years at a rate of -22.9% per year. Net Income has been decreasing at a rate of -21.3% per year. Diluted EPS have been decreasing at a rate of -20.9% per year. By themselves these data show consistent contraction. The data indicate that ANF does not deserve to be trading at a premium multiple of 29.74 even if average analysts' EPS growth estimates for ANF are reasonably high this year and next. ANF has failed to deliver on growth too many times and it is beginning to look like this year will be another one of those times.

The chart below shows both the adjusted operating earnings and the operating margin (%) for the last five years.

(Click to enlarge)

The chart shows how both the adjusted operating income and the operating margin fell dramatically in the last recession. The operating income indicates that ANF has not come close to getting its old business back. You should also note that the data do not come close to indicating the actual GAAP income. The GAAP income decreased -15.1% according to the Financial Summary table at the top of this page. The operating margin rose from 2009 to 2010. But it has since started falling again. It was 5.2% at the heart of the depression in 2009. It rose to an average of 8.3% in 2010. Then it fell back last year to 7.6%. In the trailing twelve months from the end of Q1 2012, it was even lower at 3.71%. This last is even lower than the average low for 2009 (the heart of the recession). This value is about 10 percentage points lower than the average for ANF's industry. The net margin is even lower at 2.49% for the same trailing twelve months. This last is getting dangerously close to not making a profit at all. The return on equity of only 5.86% versus an industry average of 44.37% also makes one think that ANF is seriously troubled. The -87.13% EPS growth rate for the most recent quarter (Q1 2012) reaffirms this idea again.

The 9.80% short interest as a percentage of the float adds to the list of bad indicators. The sales of 29% of insiders' interests in the stock over the preceding six months adds to the list of bad indicators. The sales by institutions of 38.24% of their stock shares from the prior quarter to the latest quarter adds further to the list of bad indicators. There don't seem to be many strong points to this stock other than some "dated" analysts' forecasts.

The five year chart of ANF below shows what happened to the stock price in the last recession.

(Click to enlarge)

In the last recession, ANF fell dramatically from a near term high of $84.23 to a low of $14.64. ANF nearly reached those highs again in 2011. This year it has already fallen dramatically, but it can fall still further. Its net sales distribution was 65.2% U.S. store sales, 21.1% international stores, 13.3% Direct-to-Consumer sales, and 0.4% Other. Much of ANF's international sales are European sales. This means that the health of the company will likely be dictated primarily by the health of the U.S. stores' business and secondarily by the health of the European stores' business. The above data has already shown that ANF's business has been contracting consistently. The historical chart of U.S. retail sales below shows that a general sales downturn such as that occurred in 2008 may be starting again.

(Click to enlarge)

U.S. retail sales have been consistently decreasing since March 2012. The last four months of data are $362.45B, $360.17B, $359.62B, and $357.76B. In the last month US retail sales decreased at an annualized rate of -6.21%. This is significant. However, it is so far not as severe as the downturn in 2008. We could be in for much more severity soon. The fiscal cliff is looming. The EU credit problems are looming. Either of these could push U.S. retail sales into a much steeper decline. For now the current declining trend is likely enough to destroy ANF's profitability soon, if it hasn't already. History does repeat itself.

The European retail sales are also in a downturn. Based on the Retail Purchasing Managers' Index data from Markit, the Eurozone retail sales have been in decline for 14 successive months now on an annual basis. In other words even worse conditions exist for ANF's European stores. In fact retailers cut back on staffing in July 2012, and that has been the fourth consecutive month of job shedding.

On Monday July 30, 2012, Morgan Stanley cut this year's EPS estimate 9% ahead of Thursday's FQ2 sales report for the teen-apparel retailer. MS said, "Domestic store checks show elevated clearance-inventory levels and ANF's 2Q international business likely slowed from 1Q's rate." Hence MS cut its profit view for Q2 2012 to 15% below consensus (Dow Jones Newswires). I am not sure of the exact number, but the data I have presented above strongly support MS' view is correct in its direction. More than that the data above leave room for a much gloomier view in future quarters, especially with the fiscal cliff looming in the near future in the US.

If you again look at the five year chart of ANF above, you can see that ANF is in a strong downtrend. During the recent market upturn, ANF's price line has pushed above its 50-day SMA. However, with the news MS is likely correctly forecasting for Thursday Aug. 2, 2012, ANF should quickly pass through its 50-day SMA in a continuation of its general down trend. The FQ2 news on Aug. 2, 2012 may precipitate a still faster decline for this week. Traders should be able to take advantage of this. The chart indicates that ANF might move quickly from its current $35.39 to an area of support around $30. A trader should be able to make good money trading this. If you allow for the down move to perhaps be longer term, you also have ANF's earnings coming up on Aug. 15, 2012. These seem destined to push ANF down also. Longer term ANF is a good short. The current US and EU retail sales downtrends should mean that ANF will perform much more poorly than most analysts have estimated. It may begin losing money at any time. If history is any indication, it is going into a black hole. That hole is likely one of steep descent for the next 6+ months at least. ANF is a sell under these conditions. For an aggressive trader, it is a short.

If you are interested in other U.S. retailers that may experience contractions in their business, you might look at Guess' Inc. (GES), Macy's Inc. (M), and Saks Inc. (SKS).

NOTE: Some of the fundamental fiscal data above came from TDameritrade and Yahoo Finance.

Good Luck Trading.

Source: Abercrombie & Fitch Co. Is Seeing Increased Weakness In A Weak Economy