Smells Like Teen Retail Deterioration: Abercrombie & Fitch Downgraded By Oppenheimer

Abercrombie & Fitch Co. ANF shares declined 55 percent during 2016, and Oppenheimer’s Anna Andreeva believes the consensus expectations have further downside risk.

Andreeva downgraded the rating on the company from Perform to Underperform.

Deteriorating Teen Space

The analyst explained that the consensus forecasts might come down further “as the brands, especially A&F, remain in transition amidst increasingly more competitive teen landscape, international profitability is still eroding, and balance sheet concerns mounting.”

Andreeva also noted that the domestic teen environment was deteriorating. Following ARO closing its remaining 100 stores, the overlap of Abercrombie & Fitch with the new rebranded ARO would only come down marginally, while American Eagle Outfitters AEO expected to benefit more.

On the other hand, the elevated promotions over the Holiday period could lead to the consensus gross margin forecasts for Q4:16 coming down 20–40 bps.

International

In addition, Abercrombie & Fitch’s international business has reported negative comps for three years, with further deceleration in Q3:16, driven by the company’s flagships.

Andreeva pointed out that while the company had negotiated “flagship kick-outs” in Korea and Hong Kong, it is not re-evaluating its international fleet.

The analyst also noted balance sheet concerns for the company.