Abercrombie and Fitch Downgrade: A Sign of the Times?

This is just continuing evidence of a lackluster consumer environment. Abercrombie and Fitch (ANF) same store receipts were down in August, setting up what I predict will be a downward accelerating consumer environment. Both Citi and Merrill Lynch downgraded ANF on Friday, citing deteriorating sales and increased markdowns. In fact, Citi went as far as to say that they think ANF could trade at its lowest multiple in five years. This is just something to keep an eye on as you try to balance your portfolios.

Specialty retail is being hit hard (and will continue to take a hit), as the negative effects from the housing market, consumer credit crunch, and inflation take a toll on consumer's pocketbooks. Abercrombie is known for its upscale niche within the teen segment, often selling more expensive items than the likes of competitors Aeropostale (ARO), who seems to be doing fine in this environment. So, look for consumers to "trade down" in this environment.

In any given sector, I like to take a balanced approach and often times am market neutral. For instance in retail, being long the likes of Wal-Mart (WMT) or various other discounters who sell essentials (food, gas, toiletries, medicine) is very appealing to me. Then, you take the other side by going short discretionary retailers, such as ANF: long cheap and/or necessary items versus short expensive and/or discretionary items.

The same logic can be applied to food by going long the likes of McDonald's (MCD) for the "cheap" factor (although they might see some slight headwinds due to their strong international presence and a rising U.S. dollar). Then, shorting casual dining restaurants such as BJ Restaurants (BJRI) or Darden Restaurants (DRI), who are feeling the pinch of rising input costs and slower dining traffic.

The main point to take away here is that we all know the consumer is strapped for cash. However, I think too many people are counting on a recovery. With vast evidence of the housing market accelerating to the downside, I just don't see how that is possible. Add in the consumer credit crunch and the inflationary pressures consumers are seeing on everything they buy, and you have a recipe for a very thrifty consumer.

Disclosure: None

Comments

[supershort:]

Yep and Cramer the biggest pump jobber that there is had DArden CEO on after reporting a dismal quarter to try to pump the stock. PAthetic. Although I shorted this pig before and made money, this time I may dollar short average whith the "Cramer pop" it's going to get. Pathetic.

2008 Sep 16 08:22 PM