2 Reasons Abercrombie & Fitch Co. Stock Will Fall in 2015

By Markets Fool.com

Shares of Abercrombie & Fitch jumped nearly 6% on Dec. 9 after controversial CEO Mike Jeffries abruptly resigned. Under Jeffries, who led the teen apparel retailer for over two decades, the company ceded market share to rivals, slogged through PR disasters, and lost touch with its core market.

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Source: Abercrombie & Fitch.

In fiscal 2013, Abercrombie's comparable sales fell 11% year-over-year -- compared to a 1% decline in 2012, 5% growth in 2011, and 7% growth in 2010. Between 2010 and 2013, the company's annual revenue rose 19%, yet net income plummeted 65%. In other words, Abercrombie was only moving more merchandise by slashing prices.

Investors saw Jeffries' exit as a positive development for the company, but no permanent replacement has been named. Until that happens, a team led by Executive Chairman Arthur Martinez will run Abercrombie's day-to-day operations. Martinez is the former CEO of another retail failure, Sears, Roebuck, and Co. (part of Sears Holdings).

With Abercrombie's stock down 19% over the past 12 months, it's tempting to think that these storm clouds might have a silver lining. Unfortunately, two major headwinds could blow the stock further off course in 2015.

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Waning teen appeal
First and foremost, Abercrombie & Fitch has lost touch with its core demographic.

In Piper Jaffray's recent "Taking Stock With Teens" fall survey of 7,200 teen shoppers, Abercrombie & Fitch failed to rank among the ten most preferred clothing brands, after ranking 10th in the spring survey. A&F's California-style Hollister brand ranked 7th, down from 5th place in the spring. The top five spots for the fall were held by Nike, American Eagle Outfitters , Forever 21, Ralph Lauren, and Urban Outfitters, in that order.

In fact, A&F ranked highly on the list of brands that teen girls say theyno longer wear. On that list, Aeropostale and Abercrombie respectively ranked first and second, and Hollister came in fourth.

On the bright side, Abercrombie & Fitch is no stranger to reinvention. Abercrombie & Fitch was known as an sporting goods and apparel brand for nearly a hundred years before being reinvented as a premium teen apparel brand by Limited Brands in the late 1980s. To Jeffries' credit, that reinvention worked out fairly well until the Great Recession hit in the late 2000s.

Loss of pricing power
But when the recession hit, consumers embraced cheap "fast fashion" apparel from companies like Forever 21, H&M, and Zara. Even Target became a hip place for teens to shop. In the Piper Jaffray teen surveys, Target actually tied with Abercrombie as the tenth most preferred brand this spring.

However, Abercrombie didn't lower its prices out of fear of losing its premium appeal, and comparable sales plunged 23% YOY in 2009. With its premium branding stripped away, Abercrombie had no choice but to match competitors' prices, which crushed its margins.

ANF Operating Margin (TTM) Chart

Data source:ANF Operating Margin (TTM) data by YCharts

In 2012, Abercrombie announced that it would close 180 of its U.S. stores by 2015 to focus on expanding into Europe and Asia. That effort hasn't paid off yet. Last quarter, Abercrombie's international sales -- which accounted for 35% of its net sales -- fell 12% year-over-year as international comparable sales plunged 22%. Revenue at U.S. stores fell 12% and comparable sales dropped 10%.

By comparison, Gap andAmerican Eagle's comparable sales respectively fell 2% and 5% last quarter. Gap usually weathers economic downturns well, thanks to its three-tiered (Old Navy, Gap, Banana Republic) approach to the market. For example, stronger sales of low-end Old Navy apparel can offset weaker sales of high-end Banana Republic apparel during downturns. Unfortunately, Abercrombie has no such similar strategy in place.

Storm clouds ahead
It's hard to see Abercrombie turning around anytime soon, especially without a permanent CEO.

It no longer appeals to teen shoppers, and price cuts aren't propping comparable sales up. The company's other strategies -- like avoiding big logo products, cutting costs, reducing inventories, and expanding overseas -- haven't helped its bottom line. The A&F brand still certainly has value, and could possibly be saved with a radical rebranding strategy, but the situation could get much worse before it gets any better.

The article 2 Reasons Abercrombie & Fitch Co. Stock Will Fall in 2015 originally appeared on Fool.com.

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Nike and Urban Outfitters. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.