Shares of Abercrombie & Fitch Inc. slipped 0.8 percent Thursday to close at $14.10 as investors digested whether it was realistic that the company might be acquired.
Not everyone believed that a deal with a strategic buyer would actually go through, and sources continue to tell WWD that they think Hollister is the better brand and the one that could be garnering more interest.
Eric Beder from Wunderlich Securities Inc. downgraded the stock to a “Sell,” noting, “We see little potential for a transaction at the current time.” He added that with American Eagle Outfitters — one of the retailers Abercrombie is believed to be talking to — already “taking Abercrombie market share, we see limited reason to take on an additional burden.”
Beder also pointed to Ascena Retail Group — it acquired Justice, Charming Shoppes and Ann Taylor — as a case study showing how hard it is to merge specialty retailers. “While Ascena has been able to capture cost savings, returns to investors have been dreadful, with [Ascena] down over 50 percent in the last year and trading within 10 percent of its five-year low,” he said, adding that “wringing meaningful gains from merging specialty retailers is difficult even in the most benign environments.”
And while there’s been talk of private equity taking a look at Abercrombie from time to time, Beder said that the history of specialty retailing with private equity deals has been underwhelming. Beder cited J. Crew, BCBG Max Azria Group, Claire’s and Vince as examples of firms that have been struggling after buyouts from financial players. He concluded that the “current Abercrombie & Fitch performance could not support material levels of debt…we see a limited end game for a private transaction.”
Jefferies’ Randal J. Konik has a “Hold” rating on shares of Abercrombie. He’s not keen on a combination with a strategic acquirer, noting that in the past retailers have tried to grow through new concept development and concept acquisitions — but that “very few portfolio strategies generate positive shareholder returns and, in fact, most have caused shareholder returns to be destroyed.” The analyst said that if a strategic such as American Eagle were to “materialize, we would view it negatively.”
Konik sees more value in the Hollister business compared with older sibling Abercrombie, which he said “continues to suffer through brand degradation.” Unlike Beder, Konik believes that a financial buyer would be preferable to a strategic acquirer, but noted that a private equity firm would likely reduce U.S. store count for Abercrombie, close large international flagships and focus capital deployment toward the Hollister brand.
Konik concluded that the company isn’t a “must-have” asset, and said that investors might be better off looking at “other ideas that have low valuations but have more sustainability to their franchises.” He suggested Michael Kors Holdings and Gap Inc., where its crown jewel Old Navy brings in the “vast majority of its cash flows.”
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