Abercrombie Bid Odds Rise as Woes Lure Activist: Real M&A

Abercrombie & Fitch Co. (ANF) is more susceptible than ever to a takeover as an activist investor presses for changes amid faltering sales and shifting teen clothing preferences.

The stock has lost 21 percent in 2012, the most among U.S. specialty apparel retailers valued at more than $1 billion, according to data compiled by Bloomberg. Abercrombie’s enterprise value is languishing at 5.1 times projected earnings before interest, taxes, depreciation and amortization this year, less than 89 percent of 18 peers, and its price-to-sales ratio also lags behind 16 competitors, the data show.

Takeover speculation earlier this year has given way to concern Abercrombie’s strategy is failing, prompting Ralph Whitworth’s Relational Investors LLC to seek changes and the retailer to hire Goldman Sachs Group Inc. for advice. The stock’s slump has boosted the odds of a private-equity buyout, RidgeWorth Capital Management Inc. and Alpine Woods Capital Investors LLC said, with the $3.18 billion company projected to more than double free cash flow this year. It could fetch $55 a share, a 43 percent premium, Morningstar Inc. said.

“Given the cash flow characteristics, given the premium brand, it absolutely could be a private-equity or LBO takeout,” Joshua Schachter, a Sewickley, Pennsylvania-based money manager and founding partner at Snow Capital Management LP, which oversees about $3 billion including Abercrombie shares, said in a telephone interview. A private-equity firm “would come in and see the catalyst for change. And the catalyst for change here is the direction that the current management team is taking the company.”

Adventure Seekers

“The company has a policy of not commenting on rumors or news articles,” Joseph Teklits, a spokesman for New Albany, Ohio-based Abercrombie at ICR Inc., said in an e-mail.

Abercrombie & Fitch was founded in 1892 as a purveyor of guns, fishing rods and camping gear to adventure seekers and the rich, with customers including Theodore Roosevelt and Ernest Hemingway, according to Hoover’s Inc. Chief Executive Officer and Chairman Mike Jeffries shifted the company’s focus two decades ago, and Abercrombie now targets young adults with jeans, polos and T-shirts recognizable by their moose logo. The company also owns Southern California-style Hollister apparel stores and Gilly Hicks lingerie shops.

The company is losing traction in the U.S. and Europe, where the economy is contracting amid a debt crisis that began in Greece. Sales at stores open at least a year fell 8 percent in the six-month period that ended in July, and management last month forecast a 10 percent decline for the second half of the year. In the second quarter, international same-store sales dropped 26 percent.

Overseas Sales

Abercrombie had bet that overseas sales would offset the U.S. economic slowdown and the rise of cheap clothing chains with rapid inventory turnover such as Forever 21 and Hennes & Mauritz AB’s H&M, which made American teens less likely to buy its more expensive apparel. It closed 71 U.S. stores in the most recent fiscal year even as 47 foreign locations were opened. There are plans to shutter about 180 American sites through 2015.

Its market capitalization has sunk by $1 billion this year, with the stock falling to $38.49 yesterday from $48.84 at the end of 2011. The company has missed out on a rally by competitors that’s driven the Standard & Poor’s 500 Retailing Index to a 27 percent advance in 2012.

‘Speed Bumps’

The decline left Abercrombie’s enterprise value at 5.1 times the company’s projected Ebitda of $585 million this year, according to the average of analysts’ forecasts compiled by Bloomberg. Only Columbus, Ohio-based Express Inc. (EXPR) and New York- based Aeropostale Inc. (ARO) have a lower ratio among U.S. specialty apparel retailers valued at more than $1 billion. Abercrombie’s multiple to estimated fiscal 2013 sales is 0.72, which only exceeds the valuations for Aeropostale and Express.

Abercrombie hit a “combination of speed bumps,” Richard Jaffe, a New York-based analyst with Stifel Financial Corp., said in a phone interview. “The euro or the euro market suffering economic woes, a fashion shift away from the classic teen preppy look, all those things worked against them.”

The retailer’s slump prompted activist investor Whitworth to press the company to cut expenditures and slow overseas expansion in an effort to align spending with competitors, a person familiar with the matter said last week. Abercrombie hired Goldman Sachs to facilitate discussions with Whitworth, the person said.

Reconsider Later

Whitworth isn’t pressing the retailer to shop itself around to private-equity firms or other retailers, though he could do so later, the person said.

A Relational Investors representative said Whitworth wasn’t available to comment.

Today, shares of Abercrombie fell 1.7 percent to $37.85.

Analysts project that Abercrombie will have operating margins of 7.9 percent in the fiscal year ending in January, compared with 12.5 percent at rival American Eagle Outfitters Inc. (AEO), a teen-apparel chain based in Pittsburgh, according to estimates and data compiled by Bloomberg.

Abercrombie may find it easier to restructure as a private company, said Bryan Keane, who owns Abercrombie shares in the Alpine Global Consumer Growth Fund.

“If you need to change price points, if you need to change the margin structure, whatever the conclusion is that needs to be done, it’s just easier in a private setting,” he said in a phone interview from Purchase, New York. “It’s a brand that obviously right now has operating difficulties,” he said. “Given the cash generation that these guys have, there’s always the opportunity that you can either take the company private with a management buyout or private equity.”

Cash Flow

While Abercrombie’s free cash flow plunged 80 percent to an 11-year low of $46.6 million in fiscal 2012, the figure will increase 123 percent this year, according to analysts’ estimates compiled by Bloomberg.

“The cash flow metrics are there,” making the company attractive to a private-equity buyer with the patience to turn around the business, Jaime Katz, a Chicago-based analyst with Morningstar, said in a phone interview. “It’s a very clean balance sheet, and it makes it easy to kind of maneuver the business nimbly.”

Shares of Abercrombie tumbled 50 percent through yesterday from the 52-week high of $76.81 set in October.

‘A Non-Starter’

“There’s tremendous upside,” Don Wordell, an Orlando, Florida-based fund manager for RidgeWorth, which oversees about $47 billion including Abercrombie shares, said in a phone interview. “There’s a lot of things that they can control as far as slowing down the international growth, reducing their store base here and just getting the fashion right,” he said. “The stock looks pretty attractive from that standpoint, and the numbers could really be higher.”

While Katz estimates a private-equity takeover would value Abercrombie at about $55 a share, Snow Capital’s Schachter said “it’s a non-starter below $60.” To Stifel’s Jaffe, a leveraged buyout would come in at $55.50 a share, based on Ebitda multiples paid in four comparable deals, according to a Sept. 12 report.

Concern about Abercrombie’s lagging sales and a weak economy in Europe may lead some private-equity firms to balk at such premiums, according to Anna Andreeva, a New York-based analyst at FBR & Co. Abercrombie’s projected 2013 free cash flow represents just 3.3 percent of its market capitalization, about half the figure at American Eagle.

Modern Founder

“The business obviously is struggling,” Andreeva said in a phone interview. “That potentially could keep some of the key bidders wary about coming in and buying this company.”

Jeffries, 68, may be another impediment. The company calls him “the ‘founder’ of the modern day Abercrombie & Fitch,” according to a regulatory filing. He took the helm in 1992 and transformed the one-time safari-outfitter into a sex-meets-Ivy League teen retailer with more than 1,000 locations worldwide. His vision drove success from 1995 to 2008, as sales grew 23- fold and net income increased 58-fold.

His most recent employment contract, which expires in February 2014, awards him as much as $105.6 million if control of the company changes hands and he loses his job, according to a regulatory filing from May.

It’s likely that Jeffries would oppose any takeover that saw him stripped of his leadership responsibilities, Snow Capital’s Schachter said.

“Other shareholders own 99 percent,” he said. “But he’s running it as if he owned 100 percent of the company.”

Abercrombie and Jeffries may not have the luxury of rejecting a bid, Katz said.

“Everybody has got a price, and for the right price, I’m sure they will take it into consideration,” she said. “It is a company with external shareholders, and you can’t just ignore a bid.”

To contact the reporters on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net; Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Robin Ajello at rajello@bloomberg.net

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