Abercrombie & Fitch Co. stock struggles to find its style

Strong leaders can leave a lasting impression, even after they're gone. But when that leadership turns sour, it's difficult to recover from.

Abercrombie & Fitch Co. (ticker: ANF) has dealt with the backlash against former CEO Mike Jeffries since he left, shortly after he made statements about whom he believed should wear the clothes – only the best looking, if it were up to him. More than two years after his departure, Abercrombie has yet to name a replacement.

Executive chairman Arthur Martinez is running the company, but ANF's stock has fallen 54 percent since Jeffries's departure.

In fairness to Martinez and Jeffries, many issues Abercrombie faces had already started to turn against the retailer. From problems with the brand, to the rise of fast fashion, Abercrombie appears on the wrong side of the fad. It's seen comparable sales drops in 14 of the last 15 quarters.

Fast fashion has taken the coolness factor away. Abercrombie's unwillingness to change its look or approach at the end of Jeffries's tenure left it unable to handle the influx of online retailers and fast-fashion sites, such as Rue 21 or H&M. With these new competitors vying for college student-age customers, Abercrombie sales have fallen 14 percent over the past two years.

As Abercrombie has fallen out of favor with high school and college students, the company has tried to increase the age it's targeting in marketing campaigns. But the results haven't shown much progress, says FBR Capital Markets analyst Susan Anderson.

Now Abercrombie's closing stores – it's not expected to renew expiring leases on at least 35 locations this year, and announced in August that it would close about 60 stores in total by the end of the year.

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But as Anderson points out, the company doesn't expect to retain much of the sales it will lose from the store closings through other avenues, like other locations or online. This "doesn't bode well for how the consumer thinks about the brand," she says. "It's not helping improve profitability of other stores."

The Abercrombie brand doesn't have cache. Part of Abercrombie's issue is that the brand isn't trusted, or even liked anymore. In February, the American Customer Satisfaction Index found that Abercrombie ranked last among 22 companies in customer satisfaction within the specialty retail space.

Part of the problem is that the image that Jeffries tried to convey "has stuck," Anderson says.

And that's the case, even though last year it ended its policy of hiring store workers based on their looks. It also ended the use of shirtless models at store opening events.

While these efforts are in order to ingratiate goodwill, it doesn't get rid of the stench of the lingering cologne, nor make up for the lack of innovation within its clothing. To help right that ship, it promoted Fran Horowitz to chief merchandising officer late last year. She helped turn around Abercrombie's largest brand, Hollister, which has stemmed losses, as comparable sales rate have remained flat through the first nine months of 2017.

It's also redesigning the stores, creating an open store concept for its largest brand Hollister, while Abercrombie & Fitch will launch a prototype for a new store design next year.

"We're encouraged to see the company take steps to refresh," says Deutsche Bank analyst Tiffany Kanaga. "It will take time."

International markets have similar problems to the U.S. In the latest quarter, the company's international sales fell 5 percent to $290 million. Accounting for about 35 percent of net sales, its international stores remain a drag, in part because of the strong dollar. But it's also due to how expensive they're to maintain.

When Abercrombie decided to increase its international exposure, it picked expensive locations in city centers that attract tourists. That's fine when sales were high. But as sales have declined, so have the margins made on these locations. And they're no longer getting the tourist impact at the stores, which Martinez called a "major headwind" in his third-quarter conference call.

Kanaga says the inability to know when Abercrombie will see a "reversal of tourist [and] international challenges," means there's little catalyst to turn around expectations for the stores.

It's a cheap option that still has a lot of risk. If looking at the 2017 enterprise value to EBITDA is accounted for, then it's easy to think that Abercrombie is cheap at three times 2017 numbers. The retailer sector's average is about eight.

But it's not just the valuation that analysts are looking at. When evaluating the larger landscape of retailers, where Golfsmith, Sports Authority, American Apparel, Aeropostale and PacSun all filed for bankruptcy, it's a question of whether Abercrombie can turn their prospects around to avoid the same fate.

Abercrombie's ability to recover from this current lull is something that one just can't predict right now, Anderson says.

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