Bulls battle bears over Abercrombie's future

Beleaguered teen retailer Abercrombie & Fitch on Wednesday surprised Wall Street by posting its first quarterly same-store sales gain in roughly four years.

The company's shares shot some 10 percent higher in premarket trading, before reversing, a move some analysts attributed to activity by short sellers. Those investors identify stocks that they expect to fall, borrow the shares and sell them to repurchase later when the price drops. The goal is to profit on the price difference.

Because Abercrombie's results topped expectations, analysts suggested that many of these investors abandoned their bets that the stock would go lower.

The stock's wild swings, which continued into late morning (where the shares wavered between positive and negative territory up to that point), mimicked the sentiment surrounding the once high-flying brand.

Abercrombie & Fitch bags held by shoppers
Benoit Tessier | AP
Abercrombie & Fitch bags held by shoppers

While some analysts viewed Abercrombie's results as a signal that its turnaround is sustainable, others were quick to point out that the 1 percent comparable sales gain followed a 13 percent drop in the prior-year quarter.

What's more, while bulls applauded the retailer's ability to improve sales despite pulling back on promotions, bears cautioned that pricing headwinds will persist in the teen retail space, which is being squeezed by low-price retailers including H&M and Primark.

"Such soft comparatives flatter this quarter's numbers and raise the question as to whether the better performance is a natural bottoming out, or if it is thanks to some of the corrective action that is now being taken by the management team," Neil Saunders, CEO of the Conlumino retail research firm, told investors.

"In truth, we think the results reflect a bit of both factors."

Since former CEO Mike Jeffries exited the company in 2014, management has pushed forward a number of changes at its namesake and Hollister brands, as it attempts to recover lost market share from fast-fashion retailers.

These include dialing back on the amount of logo merchandise in its assortment, giving store managers more control over what products to feature in their respective locations and shuttering one-third of its fleet.

On a call with investors after its results, management noted that it has been closing 50 to 60 stores a year over the "past several years," and will likely continue to close a "healthy amount" of locations over the next few. The company referred to these closings as an offensive move, as more than a quarter of its sales were generated online during the fourth quarter.

Abercrombie has likewise dialed back on the amount of merchandise it has in stock, which has helped it sell more products at full price.

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For some analysts, these fundamental changes in its business and merchandise are enough to signal both short- and long-term momentum for the company.

"Above expectation results were achieved despite a challenging holiday environment that included currency, traffic and weather headwinds," said Stifel Nicolaus analyst Richard Jaffe, who has a "buy" rating and $30 price target on the retailer.

Yet not everyone is convinced that Abercrombie's results will translate into long-term stability. Citi analyst Paul Lejuez said that while he continues to see upside in the near term, he remains cautious on the competitive landscape, which he expects to continue putting pressure on sales and profits.

Lejuez has a "neutral" rating and $26 target price on the company.

Both the Abercrombie and Hollister labels have been showing small but steady signs of improvement over the past few quarters. In the prior three-month period, comparable sales turned positive at the Hollister label for the first time in nearly four years. Though the same metric at the Abercrombie brand posted a 5 percent drop during that period, they nonetheless improved from the prior quarter.

Trends at the Abercrombie label continued to gain steam in the most recent quarter, but its comparable sales remained negative, falling 2 percent. The company's namesake brand has been slower to improve than Hollister, which has benefited from a rollout of new store models.

These dozen or so remodels, which will be rolled out to an additional 60 stores this year, have experienced a double-digit jump in both traffic and sales compared with the legacy locations.

Abercrombie management said that it is in the process of developing a store prototype for the Abercrombie brand, and plans to roll one out by the end of the year. In all, it expects to eke out flat or slightly positive comparable sales in 2016, despite pressure from foreign currency and other economic headwinds.

Shares of Abercrombie are up 20 percent over the past year.