Abercrombie Falls Off the Balance Beam—Who's Next?

Abercrombie and Fitch
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Abercrombie and Fitch

I wrote a blog Wednesday calling out U.S. retailers at risk in Europein anticipation of retail earnings season. Abercrombie & Fitch was on that list, but for a different reason than the rest of the pack.

While the average retailer in the U.K. ran discounts in the 30 percent to 50 percent range during June-July clearance period, the Abercrombie brand stubbornly stayed on the sidelines. My concerns about Abercrombie refusing to “play the game” showed up in Wednesday’s announcement. International same-store sales are down a jaw dropping 26 percent. As a reminder, management guided to down mid-teens for the quarter.

Abercrombie does use the promotional lever in the U.S. It may be time to join the ranks in Europe.

Abercrombie has other issues in Europe besides scaring customers with hefty price tags, and not keeping pace with the neighboring “sale” signs in the window. Cannibalization is also an issue after a torrid pace of flagship and Hollister openings. Turns out, a 26-percent decline in same-store sales is enough for management to rethink Europe. Flagship expansion is now on hold, and Shanghai and Hollister openings will slow. Annual guidance comes down to $2.50 to $2.75 a share, compared with the Street's average estimate of $3.35 a share.

Now that the European cat is out of the bag who could be next?

Michael Kors reports mid-month and while last quarter the company reported sales were not being impacted by tough European conditions (on the contrary, they said business was accelerating), the promotions I observed in June were some of the heaviest around. No shortage of discounts of 40 percent to 60 percent on apparel at the retail stores as well as Harvey Nichols and Harrods. No shortage of inventory during the sales either. Accessories and shoes also were between 30 percent and 50 percent off.

Store observations imply full-price sell-through may not have remained on the "accelerating" trajectory. While Michael Kors derives less than 10 percent of its revenues from Europe, it is still an important component of the company's future growth. Plus, European sales also carry a higher gross margin, so markdowns are something to watch out for. The good news is North America continues to steal share from the likes of Coach and represents the bulk of its business.

Guess?is a different story, with Europe representing a significant piece of the pie at more than 30 percent. While Guess promotions were deep at between 30 percent to 50 percent, and broad in terms of inventory, traffic did not seem to be responding in London stores. As one of the early starters during discount season — and the fact that the stores read heavily discounted — this seemed disappointing. As a reminder, Guess reported European retail same-store sales were running at negative mid-single digit percentages less than one month into the current quarter. Management also reminded us, it expects same-store sales to get tougher throughout the quarter.

Stacey Widlitz is the President of SW Retail Advisors Inc. She has worked at UBS, SG Cowen, Fulcrum Partners and in 2005 was one of three analysts to launch the Research Department at Pali Capital, where she covered Retail and Home Video for 5 years. Follow Stacey on Twitter @StaceyRetail.