Europe Is Crushing This Retailer's Expansion Hopes

Two weird things happened in the retail apparel sector last week. Aeropostale (NYS: ARO) shares surged 20% and Abercrombie & Fitch (NYS: ANF) shares plunged 20%. I recently explained how the reasons behind Aeropostale's big rally aren't as great as they may seem, but what about Abercrombie? The company's stock had risen by nearly 30% year-to-date, but is now down 2% for the year. Were the reasons behind this move just as sketchy as the ones behind Aeropostale's?

Not every little thing they do is magic
Like Aeropostale, Abercrombie released a preliminary sales report last Thursday. Net sales are up 21% year-over-year, and same-store sales are up 7%. In this economy, that's nothing to sneeze at. However, the numbers aren't as good as last quarter, when net sales were up 23% and same-store sales were up 9%. It would be tempting to say that those are still great numbers, and maybe just a hiccup before the growth trend continues. But for comparison's sake, Aeropostale topped out around the same point three years ago before beginning its arduous decline in sales.

Abercrombie also announced that as of next quarter, it would stop giving preliminary sales reports ahead of each quarter's official earnings report. This isn't a particularly big deal, because the company has to disclose the information eventually, and whether it's a few weeks early or not doesn't change much. However, if a company changes the way it discloses something, or stops reporting it altogether, it's usually because it's following the advice of every good mother: If you don't have something nice to say, don't say anything at all, or in this case, not until you have to.

This is typically a huge red flag, and one Aeropostale investors should have paid attention to when it announced in January 2011 that it would stop reporting monthly sales. Abercrombie and fellow teen retailer American Eagle Outfitters (NYS: AEO) made the same move. They have fared differently, but there's a reason the practice is singled out as Key Metric Shenanigan No. 1 in forensic accountant Howard Shilit's book Financial Shenanigans.

Retailers that eschewed the practice and continue to report monthly sales include The Buckle (NYS: BKE) , Limited Brands (NYS: LTD) , and Zumiez (NAS: ZUMZ) , all of whom have been reporting fantastic numbers every month this year.

The Buckle



Limited Brands






But my (almost) silent fears have gripped me
What's getting the most attention, however, is a note buried in the report, pointing out that while sales at American stores grew at a faster pace, this was more than offset by negative comps in several of the international markets, including at some of the flagship stores.

International sales account for about 20% of Abercrombie's total sales, but that number is growing rapidly as the company continues to expand. A slowdown in the European market makes sense given the continuing continental commotion, but Canada and Japan were also mentioned. It's hard to say if this is an indicator of waning international popularity for Abercrombie, or just a reflection of falling consumer confidence overall.

If waning popularity is the problem, Abercrombie will have a tough time going forward. The flagship stores were meant to be key drivers of international growth and pave the way for 45 new international stores this year. If sales are flagging at the flagships, that doesn't bode well for the rest of the fleet.

Either way, things could get rough for Abercrombie. Earnings collapsed during the recession as cash-strapped customers fled to cheaper alternatives like Aeropostale. That could happen again if the mess in Europe doesn't get sorted out and ends up dragging the global economy back down. Even if a new recession isn't around the corner, the pervasive worry that it is will continue to put a damper on Abercrombie's big expansion plans.

At the time thisarticle was published Fool contributor Jacob Roche owns calls on Aeropostale but holds no position in any of the other stocks mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. The Motley Fool owns shares of Limited Brands and Aeropostale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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