Abercrombie & Fitch Slump Overdone

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (Trefis) -- November is turning out to be a rough month for Abercrombie & Fitch(ANF) and its investors.

The teen apparel retailer's stock was thumped by over 15% Wednesday after its disappointing third-quarter earnings report. While a decline in gross margins by 3.6% was primarily responsible for the slump, concerns over Abercrombie's slowing international business also contributed to the fall.

However, the company's management confidently dismissed the concerns on its slowing international business as hype. Though we believe the decline in gross margins is a source of concern, the crash in ANF's stock was a bit overdone in our view. Abercrombie & Fitch competes with other specialty retailers such as Aeropostale(ARO), American Eagle Outfitters(AEO) and Gap(GPS) in the teen apparel space.

Check out our complete analysis of Abercrombie & Fitch here.

The decline in gross margins by over 3.5 points was the primary reason behind yesterday's stock slump. Although top line growth of 21% was encouraging, the decline in gross margins mitigated these gains. While Abercrombie suggested the decline in margins as a result of decreasing Average Unit Retail (AUR) due to promotions and increasing Average Unit Cost (AUC) due to rising production costs, this pressure on margins was still higher than anticipated, considering the tailwinds garnered by increase of 41% in company's internet revenues.

We believe that declining gross margins will continue to be a source of concern for the company. Compared to a decline of only 1.5% in margins in the prior quarter, the 3.6% margin decline highlights the extent to which Abercrombie is being forced to cut prices and run promotions to boost sales growth. While Abercrombie is banking on hiking prices and lower product costs in the future, we remain cautious until we see this evidence.

Given the current macro-economic weakness, price competitiveness is gaining over brand awareness we think Abercrombie will face pressure from those like Aeropostale and Gap.

The declining international business particularly in Europe also contributed heavily in the ANF's decline during November. Though we believe that Abercrombie's European growth has certainly slowed compared to the last two to three quarters, we consider the recent slump as a little exaggerated.