Bloomberg Gadfly: Abercrombie & Fitch(ANF) Should Spin Off Hollister

This site is approaching its seventh birthday and over the years a number of sectors have featured prominently on these pages. Energy. Media. A smattering of REITs, restaurants and conglomerates. Retail is one sector though that, excluding Sears (SHLD and ugh) hasn’t seen all that much activity so it was exciting to see a rumor pop up yesterday. Shelly Banjo at Bloomberg’s Gadfly suggested that Abercrombie & Fitch (ANF) spin off its cheaper, surfer-style Hollister brand, much like Abercrombie itself was spun off from Limited Brands back in the late 90’s. Those are PSS (pre-Stock Spinoffs) days.

The argument is that Hollister has actually been able to grow same store sales recently (albeit for a mere two quarters) and has become a more important piece of the company over the years. Hollister has more store locations and now accounts for 57% of the overall sales despite selling lower priced items. Apparently it has also done a better job ‘resonating’ with the notoriously fickle younger population.

Essentially, the article sets up a ‘good’, ‘growing’ company, Hollister, vs. the ‘bad’, declining parent, Abercrombie. Just to make it real ‘bad’, the author suggests loading Abercrombie with all of the debt so that Hollister can start life with a clean balance sheet. Why not?

Is two quarters of year over year growth really enough of a story to sell investors though? Retail, and especially teen focused apparel shops, is a fiercely competitive space and the trends are always changing. Given that, it seems a bit premature to break up a company after a few blips of YOY revenue growth when overall sales at both Abercrombie and Hollister have been declining for years. Maybe things will change next season and Abercrombie will regain it’s lost glory? There also isn’t much color available on the profit side, although overall EBIT and EBITDA margins have been declining. The guess is that Hollister’s margins are lower though and it’s rare to see the low margin business as the proverbial ‘goodco’.

It also doesn’t feel like the ‘go to’ spinoff rationales, such as ‘dedicated management’ or ‘appealing to different investor groups’ would really apply in this case. It doesn’t mean the company wouldn’t use them, but the two brands basically do the same thing and would likely attract the same set of investors. There may even be some internal ‘synergies’ on the purchasing side between the brands.

These ideas can pick up steam though, especially for stocks which have struggled for years and years. Despite yesterday’s gain, the past year – heck, even 10 years – have not been kind to Abercrombie shareholders so they may be open to something new. Maybe management will run with it in order to knock the stock out of the doldrums. The current shareholder base doesn’t include any activist names, but one of the big names going on about teen fashion would certainly be amusing to watch.

Maybe apparel stores will be the next sector to embrace the spinoff, but it doesn’t feel like the trend will be starting here.

Disclosure: Author holds no position in any stock mentioned