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Abercrombie & Fitch Saves American Eagle From Making a Big Mistake

You can hear American Eagle Outfitters (NYSE: AEO) investors give a huge sigh of relief after Abercrombie & Fitch (NYSE: ANF) called off talks about selling itself. Because the ailing teen retailer has decided to go it alone and pursue "the rigorous execution" of its turnaround plan, American Eagle has been saved from the ignominy of turning into the next Sears Holdings (NASDAQ: SHLD).

Someone, save it from itself!

In May, the struggling teen-apparel retailer announced that it was "in preliminary discussions with several parties regarding a potential transaction," with two primary suitors rumored to be American Eagle and Express (NYSE: EXPR), but those retailers are in no condition to be trying to save the one-time king of polo shirts and popped-collar preppy style.

Image source: Getty Images.

Despite seeing a modicum of success at its Aerie brand, it's only a small part of American Eagle Outfitters total while its much larger namesake brand is suffering from falling same store sales. It is guiding for second-quarter comps to be at best flat for the period companywide, but they could decline by another 1%, so it needs to get its own house in order before it can think about taking on a monumental project like an Abercrombie turnaround.

The bralette trend that's bolstered Aerie thus far will only continue to go on for so long, and then American Eagle will need to find the next big hit, which isn't an easy task.

In the express lane of decline

Similarly, Express is also struggling mightily to remain relevant in the marketplace. Comps fell 10% for the first quarter, and that's even including the strong 27% gain in sales its e-commerce division notched. It's had to turn to being very promotional to move merchandise, and that resulted in a big 380-basis-point drop in merchandise margin.

As a result, Express announced in May it was going to shut down all 17 of its Canadian stores and seek protection under the Companies' Creditors Arrangement Act, which allows a business to avoid bankruptcy while restructuring itself and paying its creditors something. It, too, isn't financially healthy enough to take on the task of nurturing another ailing business.

The shadow cast by Sears

That was the conceit of Sears chairman and CEO Eddie Lampert who thought he could take the failing Sears, Roebuck chain and meld it into the failing Kmart and somehow come out with a healthy business. As has become all too clear in the decade or so since, that was a disastrous move.

Although there were certain fatal decisions made in the Sears-Kmart saga that might not be repeated elsewhere, such as Lampert's refusal to invest in his stores because of the mistaken belief customers didn't care about their appearance -- a choice that's resulted in Sears' stripping the chain of virtually everything of value in a bid to stay solvent -- it doesn't mean American Eagle or Express could have avoided the same fate.

Image source: Getty Images.

Abercrombie & Fitch does retain some value as a brand, but as its attempt to transform itself from a teen retailer to one targeting adults 18 to 25 is failing to gain any traction, it may be just as much nostalgic reminiscences as anything. There are few reasons twentysomethings would find a need to go back in time to the teen retailer of their youth, and it failed at this gambit once before anyway. It tried a cradle-to-grave, approach with Abercrombie Kids targeting the toddler set, Abercrombie going after preteens, Abercrombie & Fitch and Hollister focusing on teens, and Reuhl being an adult-oriented apparel store. Most of those concepts have been abandoned.

If Abercrombie & Fitch can make a U-turn, it will be many years into the future. Investors in American Eagle Outfitters and Express should be thankful Abercrombie has decided to go it alone, because they have their own work cut out for them getting themselves back on track.

The bankruptcies of Aeropostale, American Apparel, Pacific Sunwear, Quiksilver, Wet Seal, and many more shows the difficulty brick-and-mortar retailers face today. Saddling an operation with another failing business isn't the way to nurse yourself back to health.

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