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Why Abercrombie (ANF) Should be out of Investors' Portfolio

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Abercrombie & Fitch Co. (ANF - Free Report) seems to be in troubled waters as its shares have plunged over 63% in the past one year. This Zacks Rank #5 (Strong Sell) stock has substantially underperformed both the Zacks categorized Retail-Apparel/Shoe industry and the broader Retail-Wholesale sector. While the industry fell 24.3%, the sector gained 8.7% over the said time frame. In addition, it displays a Momentum Score of ‘F’, which further gives an indication that all is not well with the stock.



Let’s Delve Deeper

Abercrombie had posted negative earnings surprises of 18%, 8.7%, 89.5% and 6.6% in the first, second, third and fourth quarters of fiscal 2016. Moreover, the company’s top line has missed the Zacks Consensus Estimate in all the four quarters. Recently, the company came out with its dismal fourth-quarter fiscal 2016 results, wherein both the top and bottom lines lagged expectations and declined year over year. The softness can be attributed to the tough retail environment due to heightened promotions in the holiday season and persistence of currency headwinds. (Read more: Abercrombie Q4 Earnings and Sales Miss Estimates)

Further, this led the company to deliver a lower-than-expected gross margin rate. Results continued to be impacted by adverse currency exchange rates, which hurt sales by nearly $16 million and earnings by 5 cents per share.

Going forward, management expects foreign currency headwinds to hurt sales and operating income in fiscal 2017 to the tune of $55 million and $25 million, respectively. Further, the company anticipates the environment to remain challenging in fiscal 2017, and it expects comparable store-sales to remain under pressure in the first half. Also, gross margin is anticipated to remain pressured in the fiscal first quarter due to greater traffic headwinds and the persistent promotional environment.

Consequently, estimates have witnessed downward revisions in the past 30 days. The current Zacks Consensus Estimate for fiscal 2017 stands at a negative of 5 cents, down from 17 cents, pegged 30 days ago.

Nonetheless, gains from the solid Hollister brand performance, renewed strength in the Abercrombie brand due to the ongoing initiatives and robust direct-to-customer sales, should provide some cushion.

However, Abercrombie also remains susceptible to macroeconomic challenges, seasonal risks and volatile consumer behavior. Moreover, stiff competition from other fashion retailers remains a threat for Abercrombie, as the failure to offer high-quality products at competitive prices may affect its overall performance.

Given the aforesaid factors, we believe it is advisable to stay away from Abercrombie for the time being until it sparks a turnaround in its performance.

Key Picks

Investors can count on better-ranked stocks in the same industry, which include The Children's Place, Inc. (PLCE - Free Report) , Genesco Inc. (GCO - Free Report) and Kate Spade & Company .

The Children's Place, with a long-term earnings growth rate of 10.3%, has surged 69% in the past one year. The stock sports a Zacks Rank #1 (Strong Buy). You can see see the complete list of today’s Zacks #1 Rank stocks here.

Genesco, which carries a Zacks Rank #2 (Buy), has increased 12.4% in the past six months. Further, it has a long-term earnings growth rate of 9.5%.

Kate Spade & Company, a Zacks Rank #2 stock, has jumped 51.8% in the past three months. Moreover, it has an impressive long-term earnings growth rate of 28.3%.

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