The market spoke loud and clear Tuesday in the wake of Abercrombie & Fitch's (ANF) second straight material earnings whiff.
Its message to the company's relatively new executive team in sending the stock down some 20% on the session: Drastic action is necessary to save the iconic retailer. Yes, it's that serious at the moment despite Abercrombie sitting on a good bit of cash -- unlike dying Sears (SHLD) -- having a good balance sheet -- unlike Sears -- and continuing to be a relevant option for young people to buy clothes -- unlike struggling Gap (GPS) . In light of two considerable earnings shortfalls after Executive Chairman Arthur Martinez reinstituted a sense of confidence last year, Abercrombie is now a show-me company that has to undertake a series of actions in order to regain investor trust.
Fortunately, all the actions are characterized as low-hanging fruit that could easily be done. If execs don't suggest in coming months that they are at least considering these options, then buying the stock on weakness ahead of the holiday season will be a tough sell to those sitting on the sidelines. So that means that as of today, the company should be in the penalty box pending more details on its action plan. American Eagle Outfitters (AEO) remains the way to play the fickle young-adult apparel space -- it's seeing full-price sales in many categories and the Aerie intimates business is crushing Victoria's Secret.
3 Actions Abercrombie Needs to Take Immediately
Clean Up the Store Base Once and for All: Abercrombie & Fitch has done a great job shutting underperforming stores, almost two-thirds of the U.S. store base to be precise in recent years. If Gap was as aggressive as Abercrombie in exiting bad locations, it would be in a different place with disgruntled shareholders. But now Abercrombie has to get even more serious with its store closures in order to cut costs in this fast fashion backdrop, and then pour all of those resources (like Macy's (M) is doing) into the very best locations. There is strong reason to believe Abercrombie is sitting on sizable store-related cost savings -- about 50% of its U.S. store leases expire by the end of 2017. That is significant.
It's time for execs to stop teasing investors with the prospect of one final, profound store closure plan (the company has been closing 60 stores a year). The tease has injected false hope into the minds of investors who continue to wait for a mass closure of well over 100 stores. Get it done, and let's stop jerking around. That extends to exiting certain flagship stores overseas because they are too close to one another, which constrains the return profile.
Get Into Department Stores: The company has ever so quietly begun to dabble in becoming a wholesaler, or selling clothes on other people's websites. It recently struck a deal to sell offerings on European online site Zalando, which came after an earlier deal with British online seller ASOS. Now Abercrombie has to move from dabbling in becoming a wholesaler and flat out go after the opportunity by joining forces with department stores such as Macy's (in top locations only) and Nordstrom (JWN) . The company could use the new distribution channels to launch pricier, fashion-forward offerings for the ANF brand that say to the consumer the company is no longer logo T-shirts and ripped jeans.
As of today, the company is limiting its sales potential by keeping its newly redesigned clothes in dimly lit Abercrombie stores. Ideally, Macy's should meet Abercrombie halfway here -- hundreds of ANF shops would be a nice addition to many locations that are in bad need of some pizazz.
Team Up With an Absurdly Popular Designer: Abercrombie has greatly improved its styles over the past six months -- this millennial writer concedes to buying a couple of shirts from there recently for the first time in seven years. The problem is that the company hasn't been able to reverse public perception on what it stands for because people don't realize the changes inside the store. In order to make a splash, it's time for Abercrombie to take a page from fast-fashion retailers and team up with a well-known designer or celebrity to drive considerable fashion buzz.
If H&M could team up with popular designer Stella McCartney and sell out of tons of cheaply made product, why can't Abercrombie team up with her and sell out of a ton of much higher-quality product? A great partnership for the company in female categories would be with clothing hawk Gwen Stefani. For men, why not the stylish Cam Newton? Hell, if lowbrow J.C. Penney (JCP) can ink a private-label clothing deal with football star-turned-TV host Michael Strahan, why can't Abercrombie do something along these lines?
There is no reason it can't.