Speculating on whether a public company could eventually go out of business is no laughing matter, but it must be called out by pioneering analysts when things are starting to go completely off the rails.
And investors have to be made aware before the hucksters with ulterior motives in the financial services community pontificate on a distressed firm being a buyout candidate or the ultimate turnaround play amid a dose of magic from a new CEO or other exec appointment.
Said bluntly, Abercrombie & Fitch (ANF) is demonstrating that it could go out of business within five years. Crazy to think, right? After all, this company still has a sizable presence in malls across the country, there are huge stores positioned overseas that are a beacon of Americana, and the brand remains recognized by most shoppers globally. The company had over $500 million in cash (down year on year) to wrap up 2014. Heck, Abercrombie even has 70% of its store leases up for renewal the next couple of years -- more stores will happen, freeing up costs and expenses.
However, I think the market's punishment of Abercrombie's shares on Wednesday amid a dreadful holiday quarter (which I have been warning about in these pages), lack of comp and earnings guidance and disturbing earnings-call comments from a scab exec team were a realization the company was entering a dark place.
Here are a few of the telltale signs Abercrombie & Fitch could join RadioShack:
1. No succession plan was put in by Botox-using, now former Abercrombie CEO Mike Jeffries. That has left the company without a deep bench of talent that would attract a fresh-thinking new CEO. I am deeply concerned the company, with its storied brands and international footing, has still been unable to announce a new CEO, just as planning for the holiday season takes shape (months in advance). To me, it signals highly qualified execs not seeing a bright future for the retailer from a top-line perspective, which is all that matters when you are an Abercrombie that has already cut about $250 million in costs the past few years.
2. The brand is losing appeal internationally (as seen in weak online traffic in Europe), where the company has invested considerable sums of money in the attempt to be lavishly rewarded. Instead, the company has gotten a trifecta of ugliness: (a) it's exiting Australia completely; (b) it's lowering prices, again, at overseas Hollister mall stores and A&F flagship stores against a backdrop of bloated operating costs to conduct business overseas; and (c) the company's Seoul business was hit with an impairment charge in the holiday quarter.
3. Gross margins are being artificially inflated by average-unit-cost declines. Zero pricing power in spite of marginally better fashion. Big structural problem here, especially as global price points continue to be slashed.
4. The execs that are in place do not seem to have a handle on what to do, plain and simple. There was a sense of bewilderment on the analyst call Wednesday, when listening to execs saying they are testing whether to hang or fold clothes and leave the dressing rooms unlocked. I took little solace in the company disclosing it would be turning down the music in its stores, retraining its minimum-wage-earning teen workforce and, for the first time, introducing zippers to its jeans (has always been complicated button-fly design).
5. Hundreds of store closures are not creating scarcity-driven demand.
6. A maniacal push into outlet stores is undercutting the pricing structure at the Abercrombie & Fitch brand. The company is reaching for sales anywhere it thinks it could find them, a classic indication of a company in mounting distress.
7. The company is not moving fast enough to speed up its test of wholesale retailing. So, in other words, that would be seeing Abercrombie or Hollister shops inside a Macy's (M). I believe these mall brands will find their way back into department stores; it's much more efficient for every party involved. Aeropostale (ARO) was once owned by Macy's.
The situation at Abercrombie emboldens my view on Under Armour (UA) and Nike (NKE), which are selling the new uniforms of choice for teens.
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