Abercrombie & Fitch
tanked Wednesday following the company's weak forward earnings guidance and subsequent analyst actions on the stock.
Piper Jaffray analyst Jeffrey Klinefelter lowered Abercrombie's investment rating to market perform from outperform Wednesday, saying there is "reduced visibility for top-line recovery" after the company's earnings release Tuesday night. The analyst also reduced his price target on the shares to $34 from $42.
said Tuesday after the bell that third-quarter profit could come in flat with the prior year and below analysts' consensus expectation. The company also posted a higher second-quarter profit on a 13% increase in total sales.
The stock was lately down $3.73, or 11.2%, at $29.73 and is off about 25% from its 52-week high of late June.
"Guidance indicates that the company is not seeing a robust recovery from disappointing sales trends in June and July," said Klinefelter in a research note. Abercrombie had a 5% drop in June same-store sales and a 9% decline in July same-store sales.
The teen retailer has been closely watched by Wall Street because it has had immense difficulty posting positive same-store sales -- largely seen as a gauge of overall retailer health -- over the last year. The company is known for its lack of promotions to clear out merchandise but has managed to stay profitable in part by controlling expenses.
But Klinefelter expects that selling, general and administrative expenses could increase 250 basis points in the third quarter as Abercrombie increases payroll expenses to improve its shopping experience. Expenses rose 320 basis points in the latest second quarter as well.
Klinefelter does not expect same-store sales to improve in the second half of the year, as many on Wall Street had hoped. Abercrombie seemed poised to take advantage of the rebirth of the preppy look in the fashion scene via its popular logo shirts and sweaters, especially going into the back-to-school season.
"We do not anticipate promotional activity in the second half will boost sales given the company's decision to be less promotional," Klinefelter said, also noting that Abercrombie has said it lacks enough inventory in key back-to-school categories, including men's denim and girl's knit tops, both popular items so far this year.
Analyst Dana Cohen of Banc of America Securities said in a research note that the timing of the company's warning is striking. "Right now the fashion trend is their friend. Preppy is in. Therefore, their inability to get comps is even more surprising," she said. "If not now, when?"
Cohen also lowered her price target to $32 but maintained her neutral rating on the stock, saying she sees "wiggle room" in the company guidance for the third quarter, "particularly given their history for low-balling numbers."
Still, she dropped her third-quarter EPS estimate to 55 cents from 60 cents; the consensus is 59 cents. In the full year, Cohen now expects earnings of $2.34 a share, down from $2.44 a share, and in 2005, her new estimate is for $2.63 a share, down from $2.74 a share.
Klinefelter lowered his full-year EPS estimates on the company to $2.27 in 2004 and $2.60 in 2005. The Wall Street consensus is $2.44 a share in 2004 and $2.74 a share in 2005.
Another analyst took a different view on the company, however. "I think if your focus is on the near term, you react as the stock's reacting today," said Howard Tubin, an analyst at Cathay Financial. Taking a step back, he noted that Abercrombie has increased its profit in each of the past four years despite negative same-store sales.
As a result, Tubin said Abercrombie is still a good story and those trading on monthly same-store sales are not looking at the bigger picture.
"The first part of back-to-school was a good season for fashion retailers. There was a lot fashion newness and people shopped ... ahead of the season," he said. "Then you look at June and July, with a few exceptions, things slowed down. A theory could be that people were shopped out on spring merchandise."
In addition, said Tubin, the company is poised for more growth via its Hollister division as well as a newer unit called Ruehl, which is expected to be announced later this month, according to
Women's Wear Daily
Abercrombie also has a good amount of cash on hand. As of July 31, it had $572 million in cash and equivalents on its balance sheet, up from $511 million last year.
"Look at the balance sheet and add it all up. Look at valuation. There's no way you should be slinging the stock today," said Tobin. I think
third-quarter earnings can be better than flat ... In the past, they've said similar things, and their earnings continue to grow quarter over quarter."
Klinefelter concluded: "While we believe that management's strategy to build a portfolio of aspirational brands is a sound strategy, we believe that, in the short term, shares will be under pressure as investors are put off by continuing negative sales trends and increased expenses."
Both Piper Jaffray and Banc of America Securities do investment banking for Abercrombie. Tubin does not own shares of Abercrombie and his firm does not do investment banking for the company.