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Bear of the Day

Last Tuesday was not a fun surprise for investors in Abercrombie & Fitch shares. The company's 43% earnings miss vs. analyst profit estimates sent the shares down nearly $10 (over 20%) at one point in after hours trading and the damage was solidified on the open Wednesday.

Many institutional investors must have been caught way off-guard and then threw in the towel as 18 million shares traded that day, over 9 times the 90-day average of 1.9 million. And many questions have been circling between analysts, big investors, and the company about how they could all be so surprised by this wipe-out.

Blame the Kids

Lower-than-expected results were due to poor performance of the business catering to women's and teen's fashion needs and overall reduced traffic volume. Brand-wise, Abercrombie's comparable sales including direct-to-consumer sales at its Abercrombie & Fitch, abercrombie kids and Hollister stores declined 6%, 3% and 13%, respectively.

Should much, if any, of this be a surprise? In an era where fashion brands and fortunes are built on the fickle wishes of teenagers (and their parent's credit cards), all it takes is the next hot brand like Michael Kors , or a revival in tastes for budget-friendly alternatives like the Gap , to quiet the registers of an ANF or Aeropostale .

Below are the EPS tables that tell you what's been happening to estimates since the big miss. With only about a third of covering analysts lowering their targets so far in the past 7 days, there are probably more downward revisions to come...

(Click image to enlarge)

Dressed to Disappoint

Abercrombie's net sales for the quarter declined marginally to $945.7 million from $951.4 million in the year-ago quarter, primarily due to weak performance in the domestic market, partially offset by robust sales abroad. Moreover, the quarterly revenue missed the Zacks Consensus Estimate of $998.0 million.

The decrease in total sales reflects a decline of 8% in total domestic sales (including direct-to-consumer sales) to $597.3 million, which was partially offset by an increase of 15% in international business (including direct-to-consumer sales) to $348.4 million.

Overall, direct-to-consumer sales increased 21% year over year to $154.3 million. Including direct-to-consumer sales, the company's total comparable-store sales (comps) decreased 10%. Abercrombie’s comps, including direct-to-consumer sales in the U.S. declined 11%, while internationally it declined 7%.

Global Growth, Domestic Reversal

During the quarter, the company opened 4 international Hollister stores and launched a combined Abercrombie & Fitch and abercrombie kids store in both the U.K. and the U.S. They ended the quarter with a total of 1,057 stores, including 285 Abercrombie & Fitch stores, 150 abercrombie kids stores, 594 Hollister Co. stores and 28 Gilly Hicks stores.

During fiscal 2013, Abercrombie intends to open a flagship store in Seoul and nearly 20 international Hollister stores. It also plans to shut down 40–50 domestic stores. The company anticipates capital expenditure of approximately $200.0 million towards new store openings and other planned expenditures in fiscal 2013.

Based on assumption of lower comps in the third quarter, Abercrombie projected its third-quarter 2013 earnings guidance range to be 40-45 cents per share. And you can see from the tables above that the analyst consensus has not caught up (or down, I should say) to that guidance yet.

Hot Fashion

The Abercrombie brand was once one of the most-desired and talked about among slaves to fashion. In 2011, the stock almost recovered its 2007 glory days above $80 per share. Now this once hot rocket may need a lot more time to cool off after its scorching re-entry into the atmosphere. Watch for the estimates to bottom and turn before touching it.

Disclosure: I own KORS for the Zacks Follow The Money portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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