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Retail Wreck: Abercrombie and Aeropostale Slump

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Clothiers catering to teens and young adults were selling off Friday, paced to the downside by Abercrombie & Fitch (ANF), which was having its worst trading session since last August following a weak quarter and poor outlook.

Abercrombie & Fitch store: Credit AP

Recently, Abercrombie was down $5.78, or 10.6%, at $48.59 on volume that was triple the average for a regular full day. The most recent time it fell more was Aug. 2, when it dropped 14.6%. Aeropostale (ARO) and Gap (GPS), sellers to the same demographic as Abercrombie, were having sluggish days after their own news, shedding 9% and 2%, respectively.

Abercrombie was the story of the group, however. The New Albany, Ohio, apparel seller slid hard after it said sales for the first quarter dropped 9% to $838.8 million and that total comparable sales, including direct-to-consumer online sales, fell 15%. In its physical stores, comps sank 17%. Analysts were looking for a 7.4% decline. Abercrombie lost 9 cents a share, vs. a 25-cent loss in the same period a year ago. Along with the disappointing comps, both revenue and the bottom line missed estimates. According to FactSet, analysts on average were expecting a loss of 5 cents and sales of $938.3 million.

Shareholder angst

The forecast only added to the angst of share owners. For the full fiscal year, Abercrombie lopped off 20 cents, bringing its profit target to $3.15 to $3.25 from the previously offered range of $3.35 to $3.45. Wall Street was estimating $3.50. The cut, the company said, is "[b]ased on a modestly more cautious view for the remainder of the year" and "assumes comparable sales, including direct-to-consumer to be slightly down for the balance of the year."

Inventory shortages hurt the first-quarter results, Abercrombie said, an issue that is now "largely behind" the company. Perhaps not quite yet behind it is the fallout from a years-old interview, in which Abercrombie CEO Mike Jeffries spoke about his target audience, that recently took the web by storm. Jeffries, in the 2006 discussion, talked about his "exclusionary" brand that isn't meant for everyone, with much of the criticism centering on the idea that Abercrombie intentionally doesn't cater to larger sizes, preferring slim, good-looking customers.

[Related: Abercrombie & Ditch? Investors Bail on Beleaguered Brand]

The sell-off comes with the shares already trading at a discount to several five-year averages of key valuation measures, including forward price-to-earnings and price-to-sales ratios. As a result, the disappointing showing and preview for the months ahead have given investors reason to believe that perhaps they were already being too kind. Abercrombie has caused controversy in the past with its ads, and shoppers haven't yet shown any mass long-term offense, but the financial outlook and the Jeffries flap may succeed in making the stock a bit toxic for the time being.

The green cells indicate where the current level is above the average, and orange represents below:

Gap valuation

Source: FactSet

Meanwhile, Aeropostale was dealing with problems of its own, seeing its shares, like Abercrombie, post their biggest drop in nine months. The move came a day after it reported a first-quarter loss of 16 cents a share and a sales decline of 9% to $452.3 million. While both were better than expected, New York-based Aeropostale predicted a loss of 15 cents to 20 cents a share for the second quarter, much worse than analysts were modeling. Ahead of the numbers, a loss of 6 cents was generally foreseen.

Recently, Aeropostale was down 9.7% to $14.89.

Gap, the owner of its namesake stores, Old Navy and Banana Republic, and much larger in terms of revenue than these two, kept its profit estimate of $2.52 to $2.60 a share for the fiscal year. Still, that wasn't enough to keep its stock from falling post-earnings for the first time in four quarters. Back in February, Gap's outlook was more in line with the consensus estimate of $2.59, but the company has gotten a great deal of positive commentary this year. That's helped push up the average expectation to $2.70 a share.

San Francisco-based Gap had already provided a preview of its results earlier this month, so investors weren't entirely surprised by the late Thursday report. What they do want to see is the continued momentum they've now come to expect for longer than a year. Gap has more than doubled since the start of 2011, leaving it trading above a number of its average multiples of the last half decade, including P/E. While holding its outlook to the previous view isn't a sign of weakness per se, stockholders have developed high expectations. (Yahoo! Finance named Gap the company of the year for 2012.) Shares were off 1.9%.

Also worth noting is that, along with Abercrombie's mention of a "somewhat cautious" view, Aeropostale spoke of "uncertainty regarding the overall macroeconomic environment." Clothing and accessory sales have been trending upward since last year, according to Census Bureau data, but any worries about consumer discretionary spending would be expected to weigh on the stocks of apparel retailers.

Clothing sales

Source: Census Bureau

Then again, when a company is able to attribute its shortcomings to forces beyond its control, that makes it easier for management to shift the blame away from any of their own operational deficiencies.

Elsewhere in the group, Urban Outfitters (URBN) and American Eagle (AEO), both of which reported quarterly numbers earlier this week, were likewise lower. Urban was down 1.6%, while American Eagle slipped 0.8%.