Abercrombie & Fitch (NYSE: ANF) is such a funny stock story. The company reports what I thought was a quarter full of dire results, and the market still sends shares higher. They closed almost 4% higher, in fact, on Friday. I don't get it.
For the second quarter, sales decreased 23%, and the overall same-store sales statistic, which is a really important metric for retailers, sank 30%. A net loss of 30 cents per share was booked, mostly on the back of the discontinuation of the Ruehl business. Excluding the effect of the closure, Abercrombie made 8 cents per share, and that, according to Reuters, beat by a mile the expected loss of 7 cents per share.
The Reuters article also gave some explanation behind the rise in the stock. Believe me, I need one, because I would not have bought based on the comps alone. Looks like Wall Street likes the eliminated exposure to Ruehl, as well as the beat on the top and bottom lines.
Okay, I guess I understand this a little more. However, I can't get behind Abercrombie 100% at this point. Management is going to have a tough time competing at the malls. Rivals such as Gap (NYSE: GPS) and American Eagle Outfitters (NYSE: AEO) aren't going to stand still and let Abercrombie operate in a vacuum. However, the company has said that it will try to offer better values. Sure, that's great in one sense. From another point of view, it will be a significant adjustment to the old business model of charging a premium for style.
Can management properly handle the adjustment? Time will tell, as the cliche goes. Let's now consider the stock. Like I said earlier, buyers feasted on the report. Will they get some indigestion? The stock is up a lot this year. If I held shares at a profit, I would definitely sell into any strength. I'd then wait for a pullback and trade again. I don't want to start a long-term position in Abercrombie. The sales picture scares me. As the months go by, things may indeed improve. Perhaps I'll be more comfortable about the retailer later on in the year.
Disclosure: I don't own any company mentioned; positions can change without notice.