Abercrombie Shares Fall 20% Despite Talk of Hanging Ten

The hard-hit retail chain promises a new start after growth slows.
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After a tough Wednesday, speculation is that

Abercrombie & Fitch

(ANF) - Get Report

may just go surfing to jump-start growth.

Abercrombie's shares plunged more than 20% Wednesday to a 52-week low after the retailer reported slower-than-expected fourth-quarter sales and suggested that new stores aren't performing as well as the old ones. All that raised the possibility that the Abercrombie brand, once found emblazoned on the T-shirts of teens from Manhattan to Paducah, has maxed out its welcome.

In a conference call with investors, Abercrombie pledged to make things right, including continuing to work on its women's line, the performance of which has lagged that of menswear. But more intriguingly, the company also said it was testing a new concept in addition to its Abercrombie & Fitch and its kids' stores, which operate under the

Abercrombie

name. Abercrombie will roll out five such "Concept 3" stores this summer, well in time for the back-to-school shopping season. One store is already built.

Lifestyle Brand

"It's a lifestyle brand that has the potential to be very powerful," Chairman and CEO Mike Jeffries said on the call. "I expect it to be a huge profit contributor in the future." He wouldn't give further details.

Analysts and industry observers said there are a couple of avenues Abercrombie might pursue for higher growth. The most likely option: a surf and skatewear store, competing with the likes of retail phenom

Pacific Sunwear

(PSUN)

-- which carries favorite brands like

Billabong

and

Stussy

-- but offering private label goods instead. Marcia Aaron, analyst with

Deutsche Banc Alex. Brown

, says she expects the new concept to roll out in midmarket malls like those that are home to the current Abercrombie & Fitch stores. "Mall developers have a high regard for Abercrombie & Fitch" because of its high sales per square foot, she says, and are willing to accept the concept sight unseen. (She cut her rating on the shares from strong buy to buy and her firm hasn't done any recent underwriting for the company.)

An industry source who doesn't wish to be identified says the company has opened a design studio in surf mecca Santa Monica, Calif., and speculates that the new stores will be called

Fitch

to capitalize on the company's powerful brand name. (Abercrombie officials weren't immediately available for comment.)

The Ex-Presidents

Another, less likely possibility is to go

Old Navy

.

Gap

(GPS) - Get Report

famously took its lower-priced sibling from zero to more than $3 billion in sales in less than a decade, and that "better, best" strategy is taking hold elsewhere in retail.

AnnTaylor

(ANN)

, for example, is counting on

AnnTaylor Loft

stores to power future growth.

"Why shouldn't they?" wonders Kurt Barnard, with

Barnard's Retail Trend Report

. (His firm doesn't consult for individual companies.) "

Crate & Barrel

is doing it,

Williams-Sonoma

(WSM) - Get Report

is doing it. They can add a new market."

But Barbara Miller, analyst with

Goldman Sachs

, said she'd be surprised to see Abercrombie go lower-scale. "That doesn't seem to be their style of doing business," she says. "They're more of a premium-priced concept." (She gives Abercrombie shares her highest rating and her firm has done recent underwriting for the company.)

Looking for a Sign

While Abercrombie is still incredibly profitable, investors are clearly looking for some sign that the company's growth rate will return to levels seen in the past. While Abercrombie reported a 30% increase in earnings for the quarter ended Jan. 29, sales weren't up to expectations. Sales at stores opened at least a year rose just 3%, the first single-digit gain in 12 quarters. And the shock value was compounded by the fact that Abercrombie doesn't report monthly same-store sales; this was the first glimpse of performance investors got during the all-important holiday season. Moreover, new larger stores aren't generating the same amount of sales per square foot -- they aren't as productive, says Aaron.

Barnard wonders if the company's recent risque ad campaign might have turned off some of the parents who have to ante up for Abercrombie's pricey goods.

On the conference call, the company said it was too conservative in building up inventory in key items at the end of December and beginning of January. In addition, the women's line is still underperforming, though the company said it will continue to refine styles for the spring.

And if industry observers are right, look for Abercrombie to hang ten come summer. But whether that will be enough to convince investors to stay on for the ride is another question.