ANALYSTS POUNCE FAST AFTER A&F STUMBLES IN TEPID 1ST QUARTER
Byline: Vicki M. Young
NEW YORK — Abercrombie & Fitch Tuesday learned a difficult lesson in what can happen when a publicly held company loses some of its magic with the trend-sensitive public it serves.
Reacting to A&F’s anemic first-quarter comp-store sales (down 8 percent) and second-quarter projections, reported on Tuesday, analysts promptly cut earnings estimates, at least seven downgraded the company and its stock lost another 8 percent of its value to close at 10. The Dow Jones suffered through a tough day anyway, dropping 168.97 to 10367.78, but both A&F and its fellow youth-driven specialty chain, American Eagle Outfitters, saw their prices plummet. Several youth-connected chains with stronger recent performances bucked the market trend: Delia’s was up 3/8 to 3, and Hot Topic up 1 to 32 1/2.
A&F’s stock closed at 10, down 7/8, after dipping as low as 9 1/2. It briefly passed its 52-week low of 9 11/16 and is now at about one-fifth of its 52-week high of 49 11/16. American Eagle was down 1 7/8 to 18 7/8, a 9 percent drop, after it was downgraded to accumulate from buy.
A&F generated considerably more comment. Among the firms downgrading the stock were: Banc of America Securities, J.P. Morgan and Raymond James to “market perform” from “buy;” Robinson Humphrey to “neutral” from “outperform;” Credit Suisse First Boston to “hold” from “buy;” First Union Securities to “hold” from “buy;” Merrill Lynch to “near-term neutral/long-term accumulate” from “near-term buy/long- term buy,” and Wedbush Morgan to “long- term attractive” from “buy.”
However, at least three firms are maintaining their ratings: Robertson Stephens at “long-term attractive,” and U.S. Bancorp Piper Jaffray and Argus Research, both with a “buy” rating.
Most analysts told WWD that they believe the turnaround will take more time, at least another two, if not three quarters. Many, while pleased that the company will be issuing monthly comparable-store sales results, aren’t sure that the timing is right for the firm’s new Hollister Co. brand.
Kevin Calabrese, retail analyst at Argus Research, said, “Long-term, I think they have a pretty good sales model. Near-term, however, the company is not going to be turning around that quickly. It’ll probably take three to five quarters to know whether they will hit the same [double-digit] growth rate as before.”
Calabrese is maintaining a “buy” rating on the company. “It’s a good time for long-term, value investors to buy. I expect the company to move up 10 to 15 percent near-term.”
As for the past quarter, Calabrese noted that A&F didn’t have any “real change to their fashion” look. He added, “It wasn’t just A&F. Women’s fashion just didn’t sell in the first quarter. Women weren’t shopping because nothing stood out, there was no compelling reason to buy. There was nothing in the stores that screamed out, ‘This is new, come in and buy me.”‘
The company’s decision to provide monthly comps, Calabrese noted, is a sign of A&F bowing to Wall Street pressure. “Investors didn’t like the last quarter. Analysts and institutional investors also didn’t like being blindsided. They didn’t have any information from the company and didn’t anticipate how bad the last quarter would be. A&F is definitely trying to diffuse the institutional investors’ ire. That’s why they’re now providing monthly comps.”
Calabrese doesn’t believe that the focus on the new Hollister Co. label is a reflection of how poorly the A&F brand has been doing. “Hollister has been in the works for some time, It’s [coincidence] that it just came at the same time the company told everyone ‘Hey, we didn’t sell any women’s apparel this quarter.”‘
The analyst also said that there’s “good potential for growth” for the new brand, particularly since the teen crowd fills a big gap in the age range A&F has been targeting — the young adult A&F customers and the kids at its Abercrombie stores.
But he added, “Even though Hollister looks like it’s positioned well, it’s a question of having the right exact merchandise, and the right timing. If A&F doesn’t hit it at the right curve, there will be markdowns and it’ll be an ugly scenario. The kids are buying, but the management will have to execute.”
Calabrese expects that A&F, American Eagle Outfitters and Gap will have a “better fashion assortment,” resulting in improved sales volume. “How much better, though, I don’t know. It probably won’t be enough for A&F. Their biggest problem right now is investor sentiment. Everyone was expecting them to come back. Even though they said the first quarter wouldn’t be that good, Wall Street and investors weren’t listening. They were also expecting a big season, with Easter in April.”
Stacy Pak, retail analyst at Prudential Securities, observed, “It’s smart that they’re going to start reporting monthly because everybody releases monthly comps. Not having that information hurt them, waiting for it every quarter is an awfully long time to not have any information on how they’re doing.”
She added, “It’s positive that they met consensus earnings, but I think there’s also a lot of negatives. A negative 8 percent comps was well below anyone’s expectations. The men’s business had flat comps, which is not very good. The decline was attributable to less people coming into the stores and that’s negative to the brand. Increasing square footage is not positive, they should concentrate on their core business. There’s a reason to be concerned.”
Pak isn’t sure that Hollister is the right move for the company at this point of their refocusing. “High school students are already shopping at A&F. The challenge is how does A&F adequately differentiate Hollister from A&F? Who gets [the shoppers] for baggy jeans? Not having seen it, it’s hard to tell. Should you be doing it if your core business is not on track?”
Pak also is negative on the company’s intention to buy back 300,000 shares of the its stock. “They have $117 million on their balance sheet. Considering how low the stock price is, if they think the company is good, how come they didn’t buy back more?”
Dorothy Lakner, retail analyst at CIBC World Markets, “I think A&F is still a wait-and-see situation. I applaud the lower price points because the economy will slow down.”
Lakner believes that Hollister places the specialty retailer at risk because its attention may not be focused enough on their A&F brand. “I think I’d certainly like to see strength in their core business before turning their attention to another brand.”
Maggie Gilliam, retail and apparel analyst at Gilliam & Co., believes the problems at A&F, and others in the sector, are an indication of what the shoppers are buying and what’s not available at retailers such as A&F. “Clearly we’re seeing a change where people are buying trendier, more colorful, more feminine and more disposable stuff. You can see that in the success of Hennes & Mauritz. The Limited is right on and Express is looking good. Some companies are really well positioned. Pacific Sunwear has figured it out. The problem with A&F is really its women’s business — they haven’t made the shift.”