Abercrombie & Fitch: Better Merchandise Elsewhere

| About: Abercrombie & (ANF)
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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.

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.

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.

Disclosure: I am long BKE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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