There was a time when Abercrombie & Fitch (NYSE:ANF) was the hottest teen retailer out there. No longer. Sales have been weak. Last quarter, comparable store sales were down 5% in the U.S. and down 26% internationally. Yet, investors continue to give Abercrombie a sky-high 34 PE valuation despite cooling sales.
Remarkably, Abercrombie has been trading below its 200-day moving average for almost a year. How this once-dominating teen retailer has fallen! I suggested selling the stock in August of last year when the stock was trading at a much higher $67. The stock has halved in price since then.
Abercrombie remains a short for 4 reasons.
1. Faltering margins
Known for its pricey merchandise, Abercrombie earns an average 3% on each garment sold (before taxes), well-under the better managed Buckle (NYSE:BKE), Gap (NYSE:GPS), and American Eagle (NYSE:AEO). Even the weak Aeropostale (NYSE:ARO) has better margins.
2. Their earnings record is miserable
The track record has been dismal. The 10-year, 5-year, 3-year, and 1-year average EPS have negative growth. Last quarter, earnings plunged 46%. The momentum is going the wrong way.
3. Estimates are too optimistic
Analysts are calling for a blowout Christmas season for Abercrombie. Consensus for Q4 is $1.72, a 54% increase over last year. It's a good bet they'll fall short again as comparable store sales continue to decline. When Abercrombie reports, I expect them to guide the all-important Q4 lower.
4. The chart looks lousy
Technically, Abercrombie doesn't look good. The relative strength index is dropping while the MACD turned negative.
What could go right for Abercrombie? A turnaround in same store sales would void the short thesis.
Abercrombie isn't hot anymore and deserves a much lower valuation. There's better merchandise elsewhere.
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