Abercrombie Shares Dropped: What You Need to Know


Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of fashionable teen-clothing hawker Abercrombie & Fitch (NYS: ANF) got stripped down by investors today as they fell 13.7% after a worrisome update on the company's fourth-quarter performance.

So what: It really hasn't been a great environment for retailers. At this point, though, there's a silver lining: The challenges that retailers are facing are so widely known that expectations have been reduced and then re-reduced as investors sigh and accept reality. Of course, with expectations already low, it's that much more concerning when a company says it's going to miss quarterly estimates. And that's just what Abercrombie did today.

For the quarter, the company said that sales grew 16% to $1.33 billion. That growth came as total comparable-store sales were flat thanks to lackluster sales in U.S. stores. Even more worrisome was the acknowledgment that gross margins are now seen falling 750 basis points as the company marked down goods more than expected amid an "aggressive promotional environment." Adjusted earnings per share are expected to be between $1.10 and $1.15, but the road to the bottom line may be particularly messy as the company said it's taking significant charges related to impairments and writedowns.

Now what: The announcement today was just a dismal pre-earnings-announcement warning, or a "realigning of expectations," as a corporate-communications guru might put it. Abercrombie will be presenting investors with the full, gory details when it announces results on Feb. 15.

When that announcement comes, though, it's unlikely that investors are going to hear anything that will reverse the pessimism we saw today, as management also provided a full-year 2012 earnings-per-share forecast of $3.50 to $3.75. That is noticeably below the $4.19 that Wall Street had been estimating.

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