Abercrombie Is Threadbare

 | Apr 17, 2012 | 10:30 AM EDT
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A few years ago, teen retailers could do no wrong. The group was a nonstop rocket ship powered by trendy teenagers spending their parents' guilt money. But, once the recession hit, teens un-friended the whole group, fleeing the flashy mall stores as they were forced to face the indignity of wearing clothes they already owned. Abercrombie & Fitch (ANF), for its part, retrenched. Can the company right the ship or is all hope lost?

The golden age of teen retail was in 2007. Abercrombie posted a legendary 26% same-store sales comparison, a number that forever will stand in the Retail Hall of Fame. Driven by insane same-store sales, the stock soared to an all-time high of $82. But, by 2008, when Mom and Dad could no longer use their home as an ATM, same-store sales collapsed. It got so bad that, by 2010, Abercrombie was posting a negative 23% comp -- another Hall of Fame number. Sales per square foot went from a peak of $500 in 2008 to an ugly $339.

In order to get its footing back, management has aggressively closed unproductive stores and reworked backroom operations. The company closed 135 locations in 2010 and 2011, and has identified another 180 stores for closure through 2015.

In addition, Abercrombie recently ramped up its other store concepts, such as Abercrombie Kids and Hollister, in hopes of reigniting growth. International expansion has been a major priority for Abercrombie.

The most promising concept, Gilly Hicks, ended fiscal 2011 with 21 stores -- 18 in the U.S. and three in Europe. Hopes are high that this chain, which sells female intimates and sleepwear, can open as many as 300 locations. But, right now, with revenue of less than $30 million, Gilly Hicks is too small to have any meaningful impact on earnings.

While Abercrombie management has worked hard, the company still faces margin pressure from too much winter inventory, an uncertain economic climate in Europe and a teen consumer that has moved on. With more than 1,400 total stores, I believe this company's major growth wave is behind it. Gilly Hicks won't be large enough to have an impact, and same-store sales in the other parts of the company look to be stuck in the low single digits. At least for me, Abercrombie's 15 minutes of fame are up.

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