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Abercrombie & Fitch's Sales Decline Is Hammering the Stock

Stocks in this article: ANF ARO AEO GPS

NEW YORK ( TheStreet) -- Wall Street was expecting a great deal from Abercrombie & Fitch (ANF)  in the second quarter (the stock has risen 17% in the last month) amid more fashionable merchandise assortments and quicker production processes. But a series of disappointments littered the financial statements on Wednesday, calling into question the retailer's progress in making its way back into the good graces of picky teen customers obsessed with competitors Zara, Forever 21 and H&M.

The stock fell 6% in premarket trading to $41.55.

Abercrombie & Fitch reported second-quarter adjusted earnings of cents a share compared to the Bloomberg consensus forecast of 11 cents. Net sales missed Wall Street expectations, coming in at $891 million vs. the $909.8 million consensus. Same-store sales declined at all of the company's divisions, led by a 10% drop at Hollister & Co., where the company has been focused on lowering prices to compete with the fast-fashion players in the mall. The company's Abercrombie kids and Abercrombie & Fitch adult divisions delivered same-store sales declines of 1% and 6%, respectively. Watch This: Chipotle's Monty Moran Unwraps the Restaurant's Success Story

Same-store sales: Each division for Abercrombie is mired in a long-term same-store sales downtrend, underscoring how much the competitive forces from trendier teen clothing purveyors continues to weigh on the business. The Abercrombie & Fitch division's second-quarter 1% same-store sales drop represented the sixth-straight quarter of declines, though it narrowly beat the Wall Street forecast for a 4.1% decrease. Abercrombie kids 6% same-store sales decrease also marked its sixth consecutive quarter of declining sales, and the figure was wider than the consensus decrease of 2.5%. The most alarming showing came from Hollister, where its 10% same-store sales decline badly missed the consensus decrease of 5.4%, and represented the seventh quarter in a row of falling sales. The market may view Hollister's persistent sales weakness as a sign teens will not return to the brand due to lower prices and more fashionable merchandise.

The commentary from CEO Mike Jeffries suggested that despite trendier assortments in the stores for back to school, the reception by consumers has not been as robust as Wall Street may have wanted. Further, the comments suggested the company's sales are underperforming what has been a solid start for back-to-school shopping at the likes of Macy's (M) , J.C. Penney (JCP) and Kohl's (KSS) .

"In a continued challenging environment, our sales for the second quarter were somewhat below plan, but we have seen modest improvement since the back to school floorset," Jeffries said. Read More: What Wall Street Missed in Best Buy's Earnings

Quality of quarter:
The company's earnings outperformance in the second quarter vs. Wall Street, similar to the first quarter, could largely be attributed to cost savings from an ongoing restructuring program. Stores and distribution expense declined 200 basis points in the second quarter, building on a 40-basis-point reduction in the first quarter. In 2015, Abercrombie & Fitch will have to demonstrate to investors that it's able to grow its sales to drive consistent earnings growth. 

Guidance: Although the company reiterated its full-year earnings per share outlook of $2.15 to $2.35, it slightly altered its same-store sales outlook, which casts doubt on the earnings guidance being achieved. The company forecast a full-year same-store sales decline of "mid-single percentage,, vs. the decrease of 3% to 4% guidance it provided in May.

Read More: How DineEquity's CEO is Transforming IHOP and Applebee's

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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