Jim Cramer separates the wheat from the chaff when it comes to the retail space

Key Concepts

• Fallen Retail Angels: Stocks of retail companies that have underperformed recently.
• Same-Store Sales: A key metric indicating the performance of retail stores open for at least one year.
• Inventory Write-Off: Reducing the value of unsold inventory due to obsolescence or damage.
• Accelerated Share Buyback: A company repurchasing its own shares quickly to boost stock value.
• Deep In-the-Money Calls: Options contracts with a strike price significantly below the current market price.
• Teen Retail: Retailers targeting teenage consumers, known for their fickle preferences.
• Brand Transformation: A significant overhaul of a brand's image, product offerings, and marketing strategies.
• Tariff Diversification: Sourcing products from multiple countries to mitigate the impact of tariffs.

VF Corp, Lululemon, Nike, and Gap Recap

• VF Corp (VFC): The maker of North Face and Vans. The speaker doesn't foresee a comeback soon, despite the CEO's recent $1 million stock purchase, which is seen as encouraging but not enough to warrant investment.
• Lululemon (LULU): The speaker suggested buying Lululemon ahead of the earnings report, anticipating that expectations were too low.
• Nike (NKE): The speaker wants to wait for a turn in the business before making a move.
• Gap (GPS): After speaking with Gap's Richard Dickson, the speaker believes the selling is overdone. Gap has strong same-store sales from both Gap and Old Navy, is immensely profitable, and has a lot of cash. The speaker recommends buying the stock on Monday, especially with the stock down over 20% today.

Abercrombie & Fitch (ANF)

• Overview: Abercrombie & Fitch is considered a "sink or swim" teen retailer. The company has two divisions: Abercrombie and Hollister.
• Hollister: Hollister had a remarkable quarter with same-store sales up 23%. Hollister is more cool and laid back, is on trend with good price points.
• Abercrombie: Abercrombie's brand had a 10% decline in same-store sales. Abercrombie is more reserved, has a little older clientele than its teen center partner.
• Fran Horowitz's Impact: Fran Horowitz took over as CEO in 2017 and brought the company back from the brink. She has pulled off a total reset and brand transformation, especially at the Abercrombie division.
• Horowitz Quote: "When we align product, voice and experience, our customer spends, as evidenced by the strong results we deliver for Hollister."
• Opportunity: The speaker sees an opportunity in Abercrombie's current struggles, believing that with Horowitz's track record, a turnaround is possible.
• Stock Repurchase: The company repurchased $200 million worth of stock, 5% of the total outstanding shares.
• Short Position: Abercrombie has a huge short position, standing at 13.8%.
• Tariff Mitigation: Abercrombie has diversified its sourcing, with China accounting for a low single-digit percentage of its sourcing volume. CFO Robert Ball stated, "For China specifically, we've worked for some time now to relocate sources of supply, and this year's sourcing volume from China will be in the low single digits." They sourced from 16 countries.
• Upcoming Events: JP Morgan's Matt Boss is hosting Abercrombie's CFO Robert Ball and COO Scott Lipsky in New York City and Horowitz herself on June 10th in Toronto.
• Horowitz Quote: "Abercrombie has a history of capitalizing on moments like these to further strengthen the business."
• Recommendation: The speaker recommends buying Abercrombie stock on Monday, especially if President Trump keeps trashing China over the weekend and people dump the stock.

American Eagle Outfitters (AEO)

• Overview: American Eagle had a miserable quarter, with sales down 5% year-over-year and same-store sales down 3%.
• Financials: Gross margin was off a staggering 1100 basis points. The next quarter looks no better, with guidance for a 5% revenue shrinkage again.
• Problems: The company had a $75 million inventory write-off, contributing to a $68 million operating loss. They had product misses, too much inventory, and were highly promotional to get the stuff off the floor.
• Share Buybacks: Despite the poor performance, American Eagle initiated a $200 million accelerated share buyback and separately bought $31 million of stock in the open market.
• Cash Position: The company has $88 million in cash at the end of April.
• Past Experience: The speaker's charitable trust took a big hit in the stock a few years ago and held on way too long.
• Recommendation: The speaker is not inclined to give them the benefit of the doubt again and does not recommend buying American Eagle.

Options Strategy

• The speaker suggests that if one were to buy Abercrombie ahead of the talk on JP Morgan on Tuesday, they might even do it with deep in-the-money calls to limit downside.

Conclusion

The speaker recommends buying Abercrombie & Fitch due to its potential for a turnaround, driven by Fran Horowitz's leadership and the company's proactive measures in tariff mitigation. However, the speaker advises against investing in American Eagle Outfitters, citing its poor recent performance and questionable financial decisions. The speaker emphasizes the fickle nature of teen retail and the importance of limiting downside risk.

Other Stocks Mentioned

• Ross Stores: The speaker's opinion is Ross Stores owned by TJX.
• Starbucks (SBUX) vs. Dutch Bros (BROS): The speaker prefers Dutch Bros at the moment, citing Christine Barone's "mojo" and positive experiences from when his daughter lived in Oregon.