Can Abercrombie & Fitch Overcome Its Latest Crisis?

Tomorrow, Abercrombie & Fitch will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed kneejerk reaction to news that turns out to be exactly the wrong move.

Like most retailers that aim at the younger generations, Abercrombie & Fitch has gone through ups and downs since the 2008 recession. The stock has recovered sharply over the past year, but recent controversy presents a new challenge to the retailer's climb. Let's take an early look at what's been happening with Abercrombie & Fitch over the past quarter, and what we're likely to see in its quarterly report.

Stats on Abercrombie & Fitch

Source: Yahoo! Finance.

Will Abercrombie & Fitch's earnings come in thin this quarter?
Analysts have dramatically cut their views on A&F's earnings over the past several months, reversing initial calls for a profit for the April quarter by more than $0.20 per share, and cutting current and next fiscal year estimates substantially, as well. Yet, the stock has stayed on its upward track, with a modest gain of 4% since mid-February.

Abercrombie came into the quarter on a negative note, with its release of fourth-quarter results in February sending the stock down sharply. Despite posting record revenue for the quarter, and boosting its dividend, A&F gave earnings guidance for the 2013 fiscal year that was well below what analysts were projecting, leading to the downgraded projections above. Weakness in Europe played a key role in the retailer's weakness, and with Europe continuing to struggle, those headwinds could hamper Abercrombie's results this quarter and beyond, as well.

Yet, Abercrombie still thinks it can target growth in other international markets. Early last month, it announced plans to expand in Dubai, Japan, and Australia, using its Hollister brand as an entry point, and targeting an earnings-per-share growth rate of 15%. That goal isn't entirely unreasonable, as competitor Gap has managed to post impressive growth in the recent past. For Gap, the solution was to stop relying so heavily on discount promotions and, instead, refocus its efforts on more innovative fashions. That strategy has potential for A&F, as well.

Still, the ultra-competitive teen-retail environment presents challenges for Abercrombie. American Eagle Outfitters reported yesterday, citing lower overall revenue and net income that nevertheless exceeded expectations, despite a 5% drop in same-store sales for the quarter. Aeropostale has had trouble getting its fashions into stores quickly enough to capitalize on hot trends, and it's looking to refocus its efforts on leading the industry with fashion innovations of its own.

What Abercrombie has to resolve quickly is the controversy over CEO Mike Jeffries' comments from several years ago, and the retailer's failure to offer plus-size fashions for women. Given the cutthroat nature of the business, alienating part of your potential customer base won't help efforts to accelerate growth.

In its quarterly report, watch for Abercrombie to answer questions about the controversy, while trying to turn more attention toward its business efforts. Still, investors need to consider the potential collateral damage that criticism of the retailer's actions could have going forward.

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The article Can Abercrombie & Fitch Overcome Its Latest Crisis? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. 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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