Dive Brief:

• American Eagle Outfitters and private equity firm Cerberus Capital Management are reportedly working on a joint bid for Abercrombie & Fitch, unnamed sources told The Wall Street Journal Wednesday. Other retail rivals, including Express, are also maintaining interest, sources said, adding that a deal for the company could be reached in the next month.

• The struggling teen apparel retailer on Thursday also reported a first quarter net loss of 91 cents per diluted share and operating losses $69.9 million, though sales beat expectations. Q1 net sales fell 4% to $661.1 million from $685.5 million in the year-ago period, besting analyst expectations from FactSet cited by MarketWatch for $651.5 million. Q1 same-store sales fell 3%, narrowly edging out the FactSet exception for a 3.1% drop.

• By brand, Abercrombie same-store sales fell 10%, more than the 7% decline forecast by FactSet, according to MarketWatch, while the company’s stronger Hollister unit saw same-store sales rise 3%, well above the FactSet expectation for a 0.8% rise. 

Dive Insight:

While American Eagle and other rivals may see an opportunity in Abercrombie to broaden their customer bases, all are feeling the effects of a culling in the junior apparel sector, sparked by falling foot traffic at malls and changing consumer behavior toward online purchasing.

GlobalData Retail Managing Director Neil Saunders on Thursday characterized a potential sale of Abercrombie as a "get out of jail free card." The deal would be complicated by the company's slow turnaround and therefore somewhat risky, he said. "[T]he challenge would be finding a buyer that wants to pay a reasonable amount," he said in a note emailed to Retail Dive. "As A&F well knows, there is much work to be done before the business is back on an even keel, and with no guarantee of success, any deal would be a big gamble for the new owner."

Abercrombie's efforts to retool itself as a brand aimed at older consumers come at a difficult time for apparel retail, which has seen several longstanding brands declare bankruptcy and in some cases fold entirely. The success of its Hollister brand bodes well, however, and suggests that similar improvements could eventually arrive at Abercrombie, Saunders said. Fran Horowitz, who as president and chief merchandising officer led Hollister's turnaround, was promoted to CEO of the company in February. The flagship brand, however, is suffering from confusion, he said.

"​Not only is consumer interest in clothing becoming weaker, but reduced mall traffic and an over-supply of retailers, stores and space in the apparel market all add up to a highly unfavorable backdrop," he said. "There is no doubt that many of these negative factors affected Abercrombie over the first quarter, just as they did other retailers. However, with a brand that continues to lack clarity and definition, the impact is particularly punishing. [I]t is no surprise that comparable sales at Abercrombie are down by 10%."

In February, Abercrombie unveiled its first new store concept in more than 15 years, after taking time to make good on repeated promises to turn up the lights at its darkly-lit, heavily-perfumed stores. The retailer, however, has struggled with attempts to rebrand, and the process is taking too long, Saunders warned. 

"Unfortunately, the room for maneuver is becoming narrower as financials start to unravel," he said. "Losses increased this quarter to $61 million. In our view, this signals that last year's small full-year profit could well turn into a loss if A&F cannot re-engineer the business." 

Moody's Investors Service recently downgraded Abercrombie, due to significant earnings declines, and said it expects the retailer to show modestly lower results over the next year, Moody's Vice President and Senior Analyst Raya Sokolyanska said in a statement emailed to Retail Dive. "Even for retailers with no immediate financial pressures, consolidation provides much needed cost saving opportunities amid declining traffic, heavy promotions and weak teen spending on apparel," she said. "For Abercrombie & Fitch, a merger with the right strategic buyer can also strengthen marketing, product and digital capabilities, especially given the difficulty turning around the Abercrombie brand." 

Despite its woes, the company isn't highly leveraged, which could be an attraction for the retailers said to be interested in taking over the company. “Fortunately, [Abercrombie & Fitch] has a fairly strong balance sheet and remains profitable, which provides some comfort that it has the time and financial firepower to try and turn things around,” Saunders said in another email to Retail Dive earlier this year.