America’s Most-Hated Retailer is Headed for a Sell-off

As any teenager can tell you, what’s popular usually changes at the drop of a hat.

Having lived through the ’80s and ’90s — decades where the fashion choices can only be described as “bold” — I’ve seen this in action. Today’s must-have item could be tomorrow’s “Member’s Only” jacket.


And the current fashion landscape seems to be changing at an ever-faster pace. E-commerce and social media have sped up the trend cycle as shoppers now have access to thousands of large and small retailers all competing for your attention and dollars.

For trendy clothing retailers, building a reputation on “cool” can come at a price. Their success rests almost solely in the hands of a finicky consumer base that seems to have the attention span of a goldfish.

That finicky behavior doesn’t just apply to what’s stylish. If a brand makes a marketing or corporate blunder, they can end up falling out of favor faster than you can say “Justin Bieber.”

The retailer I want to tell you about today has struggled to stay relevant, and after a number of major missteps, its future looks cloudy at best.

Weak Brand in Fragile Retail Landscape

Abercrombie & Fitch (NYSE: ANF) just can’t seem to get things right.

The company — once the brand of choice for preppy (mostly white) American teens — was a force to be reckoned with in the 1990s and early 2000s, but the style it was known for has gone from desirable to played out.

By 2004, the company was dealing with a slew of bad press and lawsuits surrounding its racy advertising, discriminatory hiring and questionable marketing policies.

Adding insult to injury, as sales declined, then CEO Mike Jeffries gave a controversial interview to Salon, saying the company only marketed to “cool, good-looking people.” He went on to say, “A lot of people don’t belong [in our clothes], and they can’t belong. Are we exclusionary? Absolutely.”

Jeffries offensive comments turned off hordes of would-be customers and employees alike, all but dooming any hope for a potential turnaround.

The retailer finally started offering larger women’s sizes in 2013, but the damage was done. The next year, after 11 consecutive quarters of declining same-store sales, Jeffries was fired.

The past year and a half brought many changes to the ailing retailer. Major shifts in branding — like removing the logos that previously covered its clothing and focusing on older, less trendy shoppers — have helped to stem the worst of the earnings bloodshed, but revenues continue to drop.

Even though it’s been more than a year since the company ousted its controversial CEO, his legacy continues to be the albatross hanging around Abercrombie’s neck. Just a few months ago, Abercrombie & Fitch was named America’s “most hated retailer” by CNN Money after it received the lowest score on the American Customer Satisfaction Index for the retail industry.

Brand troubles and sales weakness have driven shares down nearly 80% from their all-time highs around $85. Abercrombie’s most recent earnings report showed a company still in serious trouble, and I only see things getting worse. Management even acknowledged its struggles, stating the company’s disappointing first-quarter results reflected “significant traffic headwinds.”

These factors will only be exacerbated by the fact that retailers are currently suffering from one of the worst sales periods since the Great Recession.

Pillars of the retail industry — companies like Macy’s (NYSE: M) and Nordstrom (NYSE: JWN) — are all feeling serious earnings pain amidst a major sales squeeze. Neiman Marcus is even seeking a bailout from a buyer or investor.

While retail sales saw a small uptick in May, the supposed recovery hasn’t manifested itself in corporate earnings, and we’re actually seeing weak data for June. After looking at the numbers, I believe higher fuel and food costs — not a real increase in retail sales — skewed the data higher.

Analysts at Moody’s (NYSE: MCO) lowered their 2016 retail sales forecasts to just 2% to 3% growth from previous expectations for 4% to 5%.

All in all, it’s a bad time to be a brick-and-mortar retailer… let alone one that’s disliked, overpriced and looking to reinvent itself.

Analysts Skeptical, but Doubts Not Reflected in Shares

Even though shares of ANF have slid more than 40% from their March highs, the stock is still trading with a forward price-to-earnings (P/E) ratio of 22.8 — significantly higher than the industry’s five-year average multiple of 18.4. This makes the stock expensive even without the swirling negative headwinds.

Stocks with high prices and higher relative earnings multiples are expected to grow earnings, which in turn lowers the P/E and justifies the stock price. If earnings growth is slowing, or even worse, non-existent, it’s usually the stock price that gets knocked down to compensate.

It makes little sense that investors could continue to reward a stock with declining earnings and brand problems with exceptional performance, which means ANF is overpriced for its metrics.

Analysts seem to agree.

Zacks Investment research recently downgraded the stock to a “strong sell,” and the majority of analysts have dropped their earnings estimates across all periods. However, a good number have retained their “buy” and “hold” ratings, which I believe is giving investors a false sense of confidence.

In the past 90 days, we’ve seen earnings estimates for the current quarter go from a small profit to a significant loss. In the same period, estimates for the current fiscal year have come down 26.9%, and fiscal 2018 estimates are down 22.9%.

The way I see it, given the bleak outlook for the stock and for the retail industry as a whole, it won’t be long before the bottom drops out from under shares. My initial downside target is $16.50, where there is technical support going back nearly a year to a sell-off in September.

This is 14% below the current price, but rather than simply short shares of Abercrombie & Fitch, I advise using put options to take on less risk and amplify your gains.

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