Abercrombie & Fitch Turnaround Hinges on a Good Holiday Season

If you want to make a leveraged bet on a turnaround in the retail sector this holiday season, Abercrombie & Fitch Co. (NYSE: ANF) would be a good vehicle. This is a company with expectations low enough that any minor success could push its share price higher, faster than most other retailers. A holiday renaissance for Abercrombie would come at just the right time to take advantage of a new leg up in stocks that should continue through March.

Monday’s big move higher in the major indexes all but put to rest the murmurings of a 10% correction come Thanksgiving, so if Abercrombie is going to turn around, now is the time.

Prospects do not look great though. Unemployment and inflation are both very low, and the economy looks to be moving at a decent pace, so the fact that Abercrombie keeps shrinking in the face of this is worrying. The problem extends to many retail chains targeting teens. Gap Inc. (NYSE: GPS) is down even more than Abercrombie this year, at a 35% loss in market cap. Aeropostale Inc. (NYSE: ARO) is just tragic, and it shows the absolute worst case scenario of what is indeed possible for designer chains who lose their edge. Aeropostale, a $2.5 billion company at the beginning of this decade, has been reduced to nothing more than a penny stock at $0.70 a share.

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That is not to say the same thing will happen to Abercrombie, but so far that is where the numbers have been heading. The fact that its competitors are struggling too shows that it’s not necessarily that Abercrombie is losing its competitive edge to its rivals, but that teenagers are simply spending less on clothing.

If Abercrombie is to turn around, it needs to make cheaper clothes look cool to its base in order to increase sales and its customer base at the same time. And it needs to get to its base through mobile marketing so these kids have Abercrombie on the brain the whole season. Thankfully, upper management has signaled a shift to a mobile-led business model this year. We’ll see how it works come the holidays.

Financially, the company is still in OK shape. Debt is not unmanageable, and the shares still offer a very decent 4% dividend yield. The company has kept expenses stable and continues to focus on efficiency, so there is no immediate danger, fiscally speaking.

The good news is that the stock has held steady since March, and a significant 36% of the float is short, meaning that any upside surprise could lead to a bit of a short squeeze, which would propel shares even higher than they would have otherwise gone.

In the end it is not clear if Abercrombie will have a successful holiday season, but if it does exceed expectations even slightly, gains could be higher than most retailers.

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