This Retailer May Be Doomed in 2013: Abercrombie & Fitch Co. (ANF)

Abercrombie & Fitch Co. (NYSE:ANF) has had a rough five years. The stock has plunged 40% as the company’s same-store sales, operating margins and earnings growth have all steadily declined. The retailer’s iconic branded clothing is quickly losing its appeal to its younger, more agile rivals, and its bleak outlook for 2013 suggests even darker times ahead. Is it time for investors to dump this burned retailer?

A Mixed Fourth Quarter

For its fourth quarter, Abercrombie earned $1.95 per share, or $157.2 million, which was a major improvement from the 52 cents per share, or $45.8 million, it posted the previous year. The prior year quarter’s earnings were impacted by a 50 cent charge on impairment charges and other one-time expenses. Adjusting for similar charges this quarter, Abercrombie’s earnings came in at $2.21 per share, beating the Thomson Reuters’ analyst estimate of $1.96 per share on the same basis.

Abercrombie’s revenue rose 11% to $1.47 billion, missing the average forecast of $1.49 billion.

Same-Store Sales Growth

Abercrombie’s same-store sales dropped 14% internationally and declined 1% in the United States. To put that into perspective, The Gap Inc. (NYSE:GPS) reported an international same-store sales decline of 2%, while U.S. same-store sales rose 4% at Gap, 3% at Banana Republic and 8% at Old Navy – its three primary brands.

Same-store sales at Abercrombie & Fitch Co. (NYSE:ANF)’s namesake stores were flat globally, while its Hollister brand posted a 2% decline. Abercrombie Kids was a bright spot, posting 4% growth. Its e-commerce business and direct-to-consumer sales rose 5% in the United States and 52% internationally.

Looking forward…

Although Abercrombie’s fourth quarter earnings were mixed, it was its bleak guidance for fiscal 2013 that sunk the stock. For 2013, Abercrombie expects to earn $3.35 to $3.45 per share, missing the analyst estimate of $3.67 per share. It also expects a “high single-digit” decline in same-store sales during its fourth quarter, which it attributed to a lack of clearance inventory.

While the company also plans to shut down 40 to 50 stores in the United States throughout 2013, it plans to open namesake flagship stores in Seoul and Shanghai, as well as approximately 20 Hollister stores overseas, including its first location in the Middle East.

Revisiting its operating model

Although Abercrombie’s gross margin grew from 59.5% to 63.4%, due to decreased discounts and lower average unit cost, its operating margin has consistently declined over the past three years.

ANF Operating Margin TTM data by YCharts

Abercrombie’s rivals American Eagle Outfitters (NYSE:AEO), Aeropostale, Inc. (NYSE:ARO) and Gap have also faced similar declines.

However, a rise in gross margin and decline in operating margin is indicative of lost profits due to operating inefficiencies.