Tuesday, May 19, 2009

Abercrombie Reverses Course!

Are public companies too focused on short-term results?

Just two weeks ago, we discussed how Abercrombie & Fitch's (ANF) stated strategy through this recession entailed keeping prices high in order to protect the brand. All that appears to have taken a dramatic turn after the company released its first quarter results late last week. Same store sales were down a whopping 30% in Q1, resulting in a $27 million loss (against a $62 million profit one year ago)! It would appear that management is no longer as steadfast when it comes to the above-mentioned strategy, based on the following quotes from Friday's conference call:

"...anticipate continued pressure on the gross margin rate for 2009 as a result of mark-downs."

"...the customer is extraordinarily price-sensitive. We are reducing AURs [average unit retail prices] in all the brands..."

It would appear Abercrombie is willing to throw in the towel, as the recession has taken a toll on results. Despite the discouraging results, however, the $27 million loss represents only a fraction of the $463 million of cash on hand the company is currently carrying. So what's prompting the apparent 180 degree change in strategy?

Arguments have been put forth that public companies are too focused on short-term, quarterly results, as opposed to what's in the best long-term interests of shareholders. As corporate and securities attorney David Feldman writes:

"...the pressure to please the [Wall] Street is intense. Every quarter, the question on analysts' minds is whether the company will meet or beat expectations in the market...the negative, of course, is that short-term results become more important than the long term goals every company must pursue in order to build shareholder value."

Is this mentality currently taking hold at Abercrombie & Fitch? It's hard to say for sure. Investors would be wise to understand the ramifications (i.e. this should fall within an investor's circle of competence) before making a bet on this company.

Disclosure: None

1 comment:

market folly said...

yea I was curious how their strategy would affect them longer term going through this continued downturn. Obviously, I thought it would do so in a negative way and it will be interesting to see if they try to stick to/go back to their plan after that quarter.

also, I had just noted that Stephen Mandel's hedge fund Lone Pine Capital completely sold out of their ANF position (I track hedge fund portfolios on my blog). It's the head story today: www.marketfolly.com

Keep up the great work love reading your stuff.