Instead of all the analyst jargon, sometimes it's best to ask the most simple question about a stock: Does the company have something people want to buy?
In the case of Abercrombie & Fitch (ANF) and Aéropostale the answer is a resounding "no." The stores are distinctly out of fashion in the fashion world and it will take something of a millennial miracle to turn things around.
Abercrombie's second-straight earnings miss and persistent same-store sales declines, driven in large part by weak traffic overseas, sent the stock plunging about 20% Tuesday. Unfortunately for investors who bought into the company's turnaround story last year, management does not see the situation improving for the second half of the year.
"We've seen very persistent traffic headwinds and we expect that to continue in the back half... we don't see a catalyst for that to change in the near term," said CFO Joanne Crevoiserat during a conference call with analysts on Tuesday.
"They just can't get it together," said TheStreet's Jim Cramer on Tuesday. "These guys don't have the right fashion," Cramer added.
Abercrombie warned that it's still seeing tepid interest for men's and women's tops. Strength in new flex denim isn't going to be enough to the make the back-to-school quarter, obviously.
The retailer's chart does not look promising either. Real Money's technical analyst Bruce Kamich said that the share price of ANF has had a hard go of it lately, "but the worst price performance of the year may lie ahead."
In the daily chart, going back 12 months, Kamich points out that prices have been marked down about 50% since the zenith in March. Along the way down, there were a number of negative technical signals, including a "bearish 'death cross' of the 50-day and 200-day moving averages" in June, Kamich noted. Furthermore, the intensity of selling, seen in the surges in volume in late May and late August, suggests that traders and investors want out. And the trend-following Moving Average Convergence Divergence oscillator just generated a new sell signal.
The technical analyst sees a price target of just $1 in the ANF Point and Figure chart. "ANF may not reach that extreme but this does suggest that the decline is probably not over," said Kamich.
While Abercrombie is not in the best shape, Aéropostale is considerably worse off. The company is in the midst of a bankruptcy auction where private equity firm Sycamore Partners has moved ahead in the bidding for assets. Aéropostale announced Wednesday that Sycamore submitted an overbid during a conference call with Judge Sean H. Lane of the U.S. Bankruptcy Court for the Southern District of New York, according to a report by TheDeal's Ian Wenik. The retailer filed for bankruptcy protection in early May and immediately began shutting down some of its 811 stores.
Meanwhile, American Eagle Outfitters (AEO) and Urban Outfitters (URBN) are both hitting the mark with millennials. AEO's aerie intimates business is crushing L Brand's (LB) Victoria Secret and remains the go-to young-adult fashion stock, according to TheStreet's Brian Sozzi.
Urban Outfitters won over young-adults with its trendy merchandise and exclusive offerings from Adidas (ADDYY) and Calvin Klein during the latest quarter. (Abercrombie said it was slow to get into the hot-selling off-the-shoulder tops).
It all comes down to who has the fashion and who doesn't, as is often the case in the youth apparel space.
"If you go back over the Urban Outfitters quarter, they talk about how fashion is winning, well [Abercrombie's] fashion is losing," Cramer said.
Then there's the store problem.
Each company still has a ton of stores open.
According to Aéropostale's bankruptcy filing, the retailer closed 154 of its stores in order to "right-size their operations by closing underperforming or geographically undesirable stores." Abercrombie has also closed about one-third of its U.S. stores over the past six years. The company expects to shutter up to 60 stores in the U.S. during 2016 through natural lease expirations. Currently, Abercrombie has 926 stores.
But the closures are merely correcting a time when both chains were expansion-happy between 2008 and 2010. For instance, in May 2009, Aéropostale invested approximately $55 million to open 50 new stores and remodel certain existing stores. Abercrombie's number of stores grew from 930 in 2006 to 1,097 by 2008.
In order to be viable in the age of digital shopping, more frequent fashion missteps and greater competition from department stores Abercrombie and Aéropostale have to keep shrinking.
Then, there is the nagging apparel deflation that has been caused by the fast fashion houses and consumers buying less post-Great Recession. While the index for apparel was unchanged in July, according to the Bureau of Labor Statistics, it experienced five-straight months of declines prior to that. Deflation makes it difficult for retailers to charge a premium price on its merchandise.
Both Abercrombie and Aéropostale must deal with overexpansion, and with the new normal that is apparel deflation and fashion misses.
That's a tall order.