Abercrombie & Fitch or Abercrombie & Ditch?

Yaniv 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 been on and off the rocks for the past couple of years. The company has been grilled in a recent wave of negative publicity. In addition, the company delivered fiscal first quarter results at near-disastrous levels, leading to a sharp decline in stock price that gave up most of 2013's gains.

The entire retail industry has delivered weak results and most competitors are still struggling due to weak traffic at the malls. Let's examine how badly Abercrombie has been hit and what competitors are doing.

Weak fundamentals

Abercrombie revised its fiscal 2013 guidance to $3.15-$3.25 per share, below earlier analyst estimates of $3.49 per share. According to the company's latest guidance, the drop is expected to continue at a higher rate this year.

American Eagle (NYSE: AEO), Abercrombie's most significant competitor, saw comparable store sales fall year-over-year at a modest rate of about 5%. Despite the challenging macroeconomic environment, American Eagle is expecting to open more stores while closing stores at a lower rate.

Aeropostale (NYSE: ARO), the specialty retailer of casual apparel and accessories, is considered Abercrombie's second most important competitor. Aeropostale comparable sales slid at a stronger rate of 15% over the quarter. The company's guidance for full-year earnings of $1.42-$1.45 represents modest growth over 2012's $1.39 per share.

Despite challenging years for retailers, American Eagle delivered a single digit growth rate while Abercrombie has shown more growth. On the other hand, Abercrombie saw a larger earnings fall during recession years. Meanwhile, Aeropostale's earnings profile has simply collapsed, and I believe that in its current state it does not represent a threat to Abercrombie or American Eagle.

Abercrombie has experienced some serious inventory issues, not to mention last year's embarrassing inventory mistake, which appear to have cost about $80 million in sales. Moreover, the company estimated that 10 of 15 points of its comparable sales decline were attributable to a lack of inventory. Aeropostale reported having too much inventory on hand, which was music to consumer ears due to the aggressive promotions the company had to initiate.

Although Abercrombie has shown stronger growth, American Eagle's consistent and steady growth rate along with a generous $1.50 special dividend paid late last year made it shine over rivals. American Eagle clearly stands out of the three companies, and I believe it will win market share from rivals, particularly Abercrombie.

Negative publicity

Quotes from by Mike Jeffries, Abercrombie's controversial CEO, led to wave of negative publicity. Among Jeffries's statements, “We hire good-looking people in our stores. Because good-looking people attract other good-looking people, and we want to market to cool, good-looking people. We don't market to anyone other than that.” I believe that Jeffries consistently delivers bad news to the company and now it appears like the final episode for Abercrombie.

After weeks of petitions and bashing from social media, Jeffries met with 18 year-old activist Benjamin O'Keefe, the initiator of the online boycott petition, who suffers from eating disorders. This helped, and although not officially declared by Abercrombie, the company has now considered producing clothes in more sizes.

Foolish bottom line

Abercrombie's recent wave of bad publicity along with ongoing deterioration of its business means that it is time to separate the stock from your portfolio. On the other hand, American Eagle stands out with its better fundamentals, impressive international expansion and decent dividend yield. Jeffries trashed the Abercrombie brand and it is only a matter of time until American Eagle captures Abercrombie's lost market share. The company Jeffries will leave behind may even represent a great takeover treasure for American Eagle.

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Yaniv Hirsch 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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