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Abercrombie shares tank after 'disastrous' quarter

ABERCROMBIE TOKYO
Kimimasa Mayama | Bloomberg | Getty Images

Shares of Abercrombie & Fitch tumbled 13.76 percent in trading Friday, as a steep dropoff in sales at the company's namesake label showed its long-awaited turnaround has veered farther off track.

The deteriorating results come amid a shakeout in the teen retail space, following Chapter 11 filings from competitors Wet Seal and Aéropostale. Meanwhile, Abercrombie & Fitch still does not have a CEO, after suspending its search to name one late last year.

Sales at Abercrombie's established stores fell 14 percent during the fiscal third quarter — double the metric's second-quarter decline of 7 percent.

"By any standard this has been a disastrous quarter for Abercrombie & Fitch," Neil Saunders, CEO of Conlumino research firm, said in a note. "Not only are total sales sequentially worse than last quarter, but revenues at Abercrombie have slumped and net income is down by over 80 percent."

"Hollister performed somewhat better, although ending the quarter with flat comparable sales is far from a stellar result," Saunders continued. "All in all, it is safe to say that A&F's recovery program, which showed some signs of promise at the start of this year, is now firmly off track."

The company's management blamed its shortfalls on traffic declines at its mall-based stores and tourist flagships; unseasonably warm weather; and currency fluctuations. At the Abercrombie label, steeper-than-planned promotions also took a bite out of its profits, as it had to discount cold-weather merchandise to make way for new products.

The drop at Abercrombie more than offset an improved performance at the California-centric Hollister brand, where same-store sales returned to flat following a second-quarter decline. All in, Abercrombie's fiscal third-quarter revenue and earnings per share fell well short of Wall Street's forecasts, and were lower compared with the prior-year period.

The Abercrombie label is in the midst of a rebranding effort, which steers away from its longtime reputation as an exclusionary line. Instead, management is working to reposition Abercrombie as a higher-quality, more mature label, which is being communicated through a new website and marketing message.

"We believe that the results of these efforts will become more evident moving into 2017 and beyond," Executive Chairman Arthur Martinez said.

Abercrombie's management expects comparable sales to remain challenging in the fourth quarter, but said that metric should improve slightly. The team is making that bet based off a wave of cooler weather, which should make its seasonal merchandise more appealing, and its ability to quickly react and restock merchandise that is selling well. The company noted success with its newer intimates and accessories categories.

More broadly, the National Retail Federation expects holiday sales to grow 3.6 percent this year, aided by a stronger economy.

But analysts aren't so sure about Abercrombie's prospects. In a note to investors Friday, Stifel analyst Richard Jaffe said that in addition to weak traffic at its tourist locations, "the brand's merchandise and marketing campaign failed to resonate with consumers."

In addition to its internal missteps, the brand has struggled to regain relevancy among young shoppers, who have shifted their spending away from the traditional teen retailers.

"Looking forward, we remain concerned regarding the A&F brand," he said.