Why Staying Away From This Retailer Makes Sense

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Abercrombie & Fitch (NYSE: ANF) has bounced back over the past month, but longs might not want to get too excited. While it’s always possible for a stock to run higher based solely on momentum, the underlying fundamentals play a much bigger role over the long haul. This company’s fundamentals don’t just pertain to numbers, but management and perception as well.

We’ll take a look at several important factors and determine whether or not Abercrombie & Fitch is a quality long-term investment, or if there’s a better option available.

What you do and don’t know

As you most likely already know, Abercrombie & Fitch CEO, Mike Jeffries, made some controversial statements back in 2006. These statements pertained to Abercrombie & Fitch targeting “the cool kids.” These “cool kids” are thin and good looking. For example, the company doesn’t sell XL sizes to females, and its maximum pants size for females is 10.

This is interesting, considering the average pants size for a woman in the United States is 14. Abercrombie & Fitch does sell XXL sizes to men, but that’s only because they might be built like linebackers.

These controversial comments drew more attention recently than in 2006 because of the increased popularity of social media. Once the news spread, it caught fast, and it even garnered the attention of Miley Cyrus, Kirstie Alley, and Ellen DeGeneres.

Miley Cyrus promised to burn all her Abercrombie & Fitch clothing, Kirstie Alley won’t allow her kids to shop at Abercrombie & Fitch, and Ellen DeGeneres cracked several jokes about the company to her 4 million viewers.

It should be noted that these aren’t the most influential people for teens, but momentum is a powerful thing, and the negative opinion of this once-great teen retailer has spread quickly.

According to YouGov Brand Index, the 18-34 age demographic now thinks less of the company than it did one year ago. This might be bad news for Abercrombie & Fitch, but it’s good news for American Eagle Outfitters (NYSE: AEO). If Abercrombie & Fitch loses customers, a portion of those customers will now opt for American Eagle.

Abercrombie & Fitch versus peers

Abercrombie & Fitch markets to good-looking and in-shape teens. That’s not a very large market. If you take away plus-size females in that age demographic, then the market is even smaller. Of course, Abercrombie & Fitch has done just fine with this game plan through the years, but the margin of error has always been small. Now that the company is dealing with public backlash, many of those good-looking and in-shape teens won’t shop there either.

While the recent controversy is often pointed at as a reason for Abercrombie & Fitch’s woes, it should be noted that the stock hasn’t performed well during a tremendous bull run throughout the broader market over the past several years -- this is never a good sign. The chart below demonstrates:

<img alt="" src="http://media.ycharts.com/charts/e7510c96a7bbc66465379475097b8cc8.png" />

ANF data by YCharts

American Eagle has outperformed Abercrombie & Fitch over the past five years, and that trend is likely to continue. It targets a wider market in several ways. For example, it markets to ages 15-25 and plus sizes are available. Another plus for American Eagle is that it currently yields 2.60%, whereas Abercrombie & Fitch yields 1%. As American Eagle steals market share from Abercrombie & Fitch and maintains a stronger image, it’s likely to be a better investment. 

If you want to invest in a retailer that offers tremendous diversification, then consider The Gap (NYSE: GPS). The Gap, through its namesake brand, Old Navy, Banana Republic, Athleta, and more, markets to men, women, teens, children, babies.

The Gap has successfully completed a re-imaging process, and it has exposure to consumers in 90 countries. Even when The Gap was struggling, it was really only struggling compared to its own history -- The Gap has delivered healthy profits over the past five years.

For those of you looking for dividends, The Gap yields 1.30%. Of the three companies mentioned in this article, you will receive the highest yield from American Eagle, but you’re likely to have the most resiliency investing with The Gap. That decision depends on your risk appetite.

Conclusion

Abercrombie & Fitch is suffering from brand decline. Not many analysts write about the CEO’s controversial comments anymore because it’s “old news,” but the truth is that those comments have had a lasting impact, and it’s still very important news.

American Eagle and The Gap look to be better investments than Abercrombie & Fitch going forward. 

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Dan Moskowitz has no position in any stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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