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There was a time when Abercrombie & Fitch (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 (BKE), Gap (GPS), and American Eagle (AEO). Even the weak Aeropostale (ARO) has better margins.

ANF Operating Margin TTM Chart

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.

(click to enlarge)

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.

Source: Abercrombie & Fitch: Better Merchandise Elsewhere

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