The young men’s and women’s apparel retailer Abercrombie & Fitch (ANF, Financial) is still having trouble getting teens to buy its clothing. The retailer posted an update on the third quarter expected results which is dull and does not give any positive signal for the stock to move upwards. In fact, the retailer is currently under immense pressure from the competition it faces from rivals such as Forever 21 and H&M. So, what is the dismal forecast being portrayed from the company's corner? Let’s dig in deeper to get to the answer. And let’s find out the reasons behind the plunge seen in the stock after the earnings update was out.
The number crunching exercise
The clothing chain that has been struggling to win back loyal teen shoppers has fallen the most in more than a year after weak store traffic took a toll on the third-quarter earnings. The retail player shared information stating that net sales for the quarter which ended on November 1 fell 12% year-over-year to $911.4 million. Thomson Reuters analysts had polled for a consensus estimate that stood at $982.2 million for the quarter; thus, the company failed to meet the expectations of the Street in terms of the top-line growth. And the worst part was that it fell short of the forecast by more than $70 million.
Same store sales were hit hard in the months of September and October when it fell 7% in the U.S. and about 15% internationally. The company agreed that sales were terribly weak in the past two months and was “significantly weaker” than August.
The retailer has already warned investors that the earnings for the quarter would be around $0.40 a share to $0.42 a share, which would be well below the analysts’ consensus of $0.67 a share. The stock immediately plunged 16.6% to $29.50 as the negativity has made investors cautious and many have started short selling the stock in the short term.
The key weak areas
Due to increased proliferation of smartphones and tablets, shoppers are now interested to shop online rather than visiting the conventional stores. This has become a concern for a number of retailers and the list includes the struggling Abercrombie. As per data compiled by ShopperTrak, store visits have dropped consistently by 5% year over year in all the months of the past two years, barring April 2014.
This has had a negative impact on the sales curve of the retailer that depends on store visits for 80% of its revenue from store sales.
The store traffic has declined mainly in Europe which has weighed on overall sales for the quarter. The company is also reducing its logo-adorned products because they no longer suit the present customer tastes. And it was expected that the Hollister brand would become the integral part of Abercrombie’s product portfolio, given that buyers are placing a greater value on the cost of products these days. But unfortunately the brand performance has remained poor, and it has not done well in the last few quarters due to missed fashion calls and poor inventory mismanagement.
The company management are already reviewing measures to drive the improvement in the results in the critical fourth quarter of the fiscal year. But one thing is clear, offering heavy discounts on stock to compete with fast-fashion companies such as Forever 21 and Hennes & Mauritz AB (HM B) has hurt the retailer through the fiscal year.
Concluding words
Abercrombie’s future guidance is not very solid and that makes investors worried about its future stock movement. But it’s best to wait until December 3 when Abercrombie will officially declare its third quarter numbers.
