Despite Near-Term Issues, Abercrombie & Fitch Remains Focused on Long Term

More consumers are trading down to cheaper alternatives on everything from food to staples to apparel, and many continue to avoid buying premium brands. In response, several retailers are lowering prices or shifting merchandise to capture sales from those customers seeking merchandise with lower price points.

This environment has been especially difficult on Abercrombie & Fitch (ANF), which is well-known for its premium fashion brands. The specialty retailer is routinely reporting monthly same-store sales in the -20% area. A big reason for the company’s weak results is that management refuses to chase its competitors down the path of lower prices. Abercrombie remains committed to protecting its premium brands while it waits for industry conditions to improve.

Management has acknowledged that the recession could continue to hurt the retailer’s results in the months ahead, but don’t look for the retailer to change its pricing strategy. Instead, management plans to survive the difficult economic environment through expense management, seasonal clearance events, and a fewer new store openings. That strategy includes closing poor-performing stores such as its RUEHL stores, all of which are going to be closed by year end.

We note that after announcing that it was going exit the RUEHL business, Abercrombie amended its existing credit agreements to exclude charges associated with exiting the RUEHL business. Management believes these operational efforts will enable the company to better protect its existing brands and end the year with a strong cash position.

We’ve been writing about consumers becoming more frugal for some time, and we continue to believe that this attitude will stay with American consumers even after the recession finally ends. That being said, we applaud Abercrombie’s decision to focus on long-term success. Too many companies get caught up in managing their business for short term, but that usually comes at the expense of long-term growth.

The retailer’s focus on the long term should position its stores to benefit when consumers finally return to shopping for premium brands. Even so, Abercrombie is likely to struggle for the next few quarters as the consumer is still a long way from paying up for premium brands.

As such, ANF shares don’t look too attractive right now. However, for those investors looking beyond the next 12 to 18 months, Abercrombie & Fitch is a retailer that should deserves a closer look.

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