By  on September 8, 2008

Abercrombie & Fitch Inc., which on Thursday reported the weakest August same-store sales performance among a pack of weak specialty stores, on Friday saw its shares drop sharply following a downgrade by Citigroup to “sell” from “buy.”

Following the morning downgrade, shares hit a new 52-week low of $47.83 before reclaiming some lost ground to finish the New York Stock Exchange session at $48.61, down $2.38 or 4.7 percent. After declining in early trading, the Standard & Poor’s Retail Index ended the day up 0.6 percent at 403.78. The Dow Jones Industrial Average ended the week at 11,220.96, which was 0.3 percent ahead of Thursday’s close.

A&F’s corporate comparable-store sales dropped 11 percent during August, as reported, as the flagship brand dropped 5 percent, Hollister Co. fell 14 percent and Abercrombie was down 17 percent. The fledgling Ruehl unit, with 25 stores, decreased 25 percent.

In her research note, Citigroup analyst Kimberly Greenberg wrote, “We believe Abercrombie is poorly positioned in a challenging consumer spending environment given its premium pricing coupled with limited innovation in its fall assortment.”

Second-half earnings estimates were lowered to $3.24 a share from a range of $3.40 to $3.45 and the target price dropped to $45 from $73. The reduction was prompted by deterioration in the European economy, initially expected to be a source of growth for A&F, as well as the company’s aggressive inventory plans and declining direct sales and Citigroup’s expectations of a high-single-digit decline in comps during the current quarter.

Abercrombie, like many retailers, is trying to “strike a delicate balance,” according to Piper Jaffray retail analyst Jeffrey Klinefelter, between managing inventories and rolling out promotions.

Abercrombie, however, has refrained from running sales, and instead has maintained full prices, said analyst Jennifer Black, of Jennifer Black & Associates.

“With most other teen retailers running enticing promotions this back-to-school season, with consumers responding to many of these incentives, it is not surprising to us that Abercrombie would fare a little worse than expected relative to the competition,” she said.

While A&F faces some of the toughest challenges in specialty retailing, it is hardly alone.

“With the release of August sales results, it is clear the back-to-school selling season is shaping up to be a disappointment for the majority of specialty retailers,” said Susquehanna Financial Group analyst Tom Filandro. “A combination of weak traffic and consumers feeling the pinch from higher costs, as well as a lack of stimulus-induced shopping, pushed the August sector comp into negative territory.”

Filandro upgraded Zumiez Inc. to “positive” from “neutral” last week following its 0.2 percent increase and called the board-and-bike-oriented store “one of the few specialty retail brands poised for significant store growth over the next several years.”

Citigroup broadlines analyst Deborah Weinswig noted that, by last month, the benefits of government stimulus checks had clearly been exhausted. “Everyone at the back half of the month was buying what they needed, as opposed to what they wanted,” she said, adding discounters were getting the lion’s share of b-t-s business, while specialty retailers and department stores struggled.

Broadline retailers may generate their own traffic, but that’s not the case for specialty stores at the mall. Even with gas prices down during August, traffic is still a problem for retailers at shopping centers, and it’s something they can’t control, said Piper Jaffray’s Klinefelter.

He feels it will be a “very difficult second half of the year” for retailers selling at higher prices.

Thomas Weisel Partners Group retail analyst Liz Dunn viewed the problems in the teen market in terms of price as well.

“I think there continues to be a story with the sort of moderate retailers and low-end retailers outperforming the high end,” she said. “I think you see that playing out in the teen space,” pointing to the success of Aéropostale Inc., which posted a 13 percent leap in comps, versus the struggles of A&F and Pacific Sunwear of California Inc., which had a 6 percent comp decline.

In the misses’ category, “there’s not a lot of fashion,” Dunn noted, citing declines of 10, 8 and 6 percent, respectively, at Chico’s FAS Inc., Cato and Caché Inc. She also noted that wives and mothers may be deferring spending on themselves to wardrobe their husbands and children.

Of course, opportunities remain. Retailers that have “differentiated or have a more global appeal should fare better in this environment,” said retail analyst Jennifer Black.

The same should be true of “niche” players with “unique merchandise,” said Pali Capital Research analyst Amy Noblin, citing Buckle Inc.’s 25.9 percent August comp increase and the 31 percent jump at American Apparel.

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