NEW YORK (TheStreet) - Abercrombie & Fitch (ANF) - Get Report shares surged on Tuesday following the teen retailer's announcement that its longtime CEO Mike Jeffries, 70, would be retiring, effective immediately.
The company was initiating a search for Jeffries' replacement and in the meantime the company formed an Office of the Chairman, consisting of Chairman Arthur Martinez, COO Jonathan Ramsden and the brand presidents for both Abercrombie and the second brand it owns, Hollister.
Mall-based teen retailers, including Abercrombie, American Eagle (AEO) - Get Report , Aeropostale (ARO) , Express (EXPR) - Get Report and others have suffered from slowing sales as consumers shop increasingly online and for gadgets and sneakers as opposed to clothes.vAbercrombie has specifically been the target of criticism given its provocative advertising and controversial Jeffries, who started the company in the early 1990s. Jeffries has publicly said that the preppy retailer is exclusionary to customers.
Abercrombie shares are down 15% for the year, but investors were cheering Jefferies' departure, sending shares higher by 6.6% to $28.10 at last check. Here's what analysts had to say about the departure:
Eric Beder; Wunderlich Securities (Hold; $30 PT)
Timing shocking...nothing else is. It has become obvious to us that given the highly disappointing performance of the company in FY15 and the recent hiring of the two brand presidents, the company was setting up a succession plan for when Mr. Jeffries' latest employment contract would expire (in February 2015). That said, for Mr. Jeffries to retire during the holiday period is surprising, and speaks, we believe, to continued weakness at the company and the overall teen space.
We see no reason, with no CEO in sight and the segment on its knees, to be aggressive in any teen retailer, let alone ANF. As the high price "leader," the company has to be the one to register some level of pricing integrity before the rest of the group can register better returns; we do not see this occurring in the near term, and the CEO search will further cloud matters. As such, we remain even more firmly on the sidelines with ANF.
Richard Jaffe, Stifel (Hold)
While we believe Mr. Jeffries played an integral role in the company's success for nearly two decades, it has been apparent that the brand has lost its luster in recent years. We think it took management, led by Mr. Jeffries, too long to acknowledge the need to transition from the company's previously successful aesthetic of an aspirational, New England prep-inspired teenager. We believe a new CEO, preferably from outside the company, will need to be able to accelerate the ongoing merchandise turnaround and offer merchandise that once again resonates with today's teenager.
While we view the CEO change as a positive, we believe finding a qualified replacement will take time and, once a replacement is found, the impact of the appointment will take time to materialize. We reiterate our Hold rating as we believe there is uncertainty surrounding both the merchandise turnaround and the CEO search.
Randal Konik; Jefferies (Buy, $40 PT)
We view this news as a positive for ANF shares. We believe the company is in need of new blood and a new direction given recent disappointing performance. The teen space has changed, and while ANF has begun the important process of making changes to its product, the environment clearly shows that possibly an entirely new direction is needed here.
What to Do With the Stock? Buy it....We believe accumulating ANF shares in the mid to high $20s provides favorable near-term risk/reward given the company's strong balance sheet and announced leadership change. However, we believe the company still has a lot of work to do to get fundamentals moving in the right direction and we have become less confident in our positive views of the company and the stock given the recent downdraft in fundamentals. As a result, while ANFs risk/reward is favorable we would also point investors to look more at American Eagle (Buy rating, $20 PT) where the fundamental direction of the company is clearly on a better trajectory.
Dorothy Lakner, Topeka Capital Markets (Hold, $26 PT)
[We] are somewhat surprised that COO Ramsden was not put into the CEO position, given his efforts to inject greater discipline into ANF's operating structure and efforts to bring down its bloated expenses and inventories, as well as his relatively long tenure at ANF compared to any other member of senior management. Now, a search is underway to name Jeffries' replacement, which could take well into next year at a time when the company needs to move forward with its turnaround plans. In addition, new brand presidents for A&F and
Hollister are literally just arriving at the company with a newly reorganized merchandising organization.
We continue to believe that ANF's turnaround, given the scope of things being changed within the company, will take a lot of time and remains fraught with execution risk, as we are seeing with 2H14 results which recently took a significant turn for the worse. While the shares are bound to pop today on Jeffries' exit, we would avoid ANF, believing American Eagle (AEO-$12.27:Buy) remains the best way to play the vertical teen space both for holiday and 2015.
Edward Yruma, KeyBanc Capital Markets (Buy)
[We] see opportunities for fresh perspectives in the teen retailing space.
The merchant princes are taking their bows. We view Jeffries as cut from the same cloth as other merchant CEO/founders. Interestingly, he now marks the third of his "generation" (Mike Rayden/Justice [Ascena Retail (ASNA) - Get Report ], Michael Weiss/Express) that announced their retirement in recent months. Some of it may be due to industry tenure, but part of it may be that the omnichannel environment may lend itself to a different skill set.
Abercrombie is uniquely Mike Jeffries. Not to engage in hyperbole, but ANF's identity is closely intertwined with Mike Jeffries. Over recent years, the Company has looked to professionalize management (addition and promotion of Jonathan Ramsden, changes to BoD, addition of brand presidents), which leaves ANF in a much better position to weather, and potentially prosper, from a change in perspective. Ultimately, we think the business remains one of the best positioned in a tough U.S. teen market (least overstored, best brand), has a nicely profitable international business, and that is best equipped to make the transition to the new teen retailing environment.
TheStreet Ratings team rates ABERCROMBIE & FITCH as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate ABERCROMBIE & FITCH (ANF) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its increase in net income, largely solid financial position with reasonable debt levels by most measures and growth in earnings per share. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself and disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Specialty Retail industry. The net income increased by 216.5% when compared to the same quarter one year prior, rising from -$15.64 million to $18.23 million.
- ABERCROMBIE & FITCH reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ABERCROMBIE & FITCH reported lower earnings of $0.70 versus $2.92 in the prior year. This year, the market expects an improvement in earnings ($1.60 versus $0.70).
- ANF has underperformed the S&P 500 Index, declining 21.83% from its price level of one year ago. Looking ahead, we do not see anything in this company's numbers that would change the one-year trend. It was down over the last twelve months; and it could be down again in the next twelve. Naturally, a bull or bear market could sway the movement of this stock.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. In comparison to the other companies in the Specialty Retail industry and the overall market, ABERCROMBIE & FITCH's return on equity is significantly below that of the industry average and is below that of the S&P 500.
- You can view the full analysis from the report here: ANF Ratings Report
-Written by Laurie Kulikowski in New York.