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Abercrombie's "Situation" Subsidy Sunk its Stock Price Right? Not Quite

So this morning, Abercrombie and Fitch reported solid earnings for the second quarter. Its revenue was up 23% off strong international sales, and its net income rose 64% to $0.35 a share, beating Wall Street estimates of $0.29. So how come its stock price closed down nearly 9% today?

If you believe the knee-jerk mythology of the Internet, the answer’s simple: The Situation. Here’s the story: On Tuesday, the market closed with Abercrombie stock above $70 a share. That night, the Ohio-based company released a statement (strangely dated Aug. 12) titled “A Win-Win Situation,” in which it announced that it had “offered compensation” to Michael “The Situation” Sorentino to “cease” wearing its clothes. Here’s the entire statement:

We are deeply concerned that Mr. Sorrentino’s association with our brand could cause significant damage to our image.  We understand that the show is for entertainment purposes, but believe this association is contrary to the aspirational nature of our brand, and may be distressing to many of our fans. We have therefore offered a substantial payment to Michael ‘The Situation’ Sorrentino and the producers of MTV’s The Jersey Shore to have the character wear an alternate brand.  We have also extended this offer to other members of the cast, and are urgently waiting a response.”

Alright. So then at 8:30 on Wednesday morning, CEO Mike Jeffries got on the phone and gave his second quarter earnings call, during which, after running through his firm’s solid numbers and fielding questions from Wall Street analysts, he apparently egged on reporters to ask him about The Situation. An hour later, fresh off the news of its strong second quarter earnings, Abercrombie’s stock price tanked, immediately opening the day at $66.23.
We’ll dub this the “Situation Subsidy,” since it’s an example of someone being paid not to do something. (We’d love to hear your thoughts on what other examples of so-called anti-endorsement contracts you can think of, and whether they actually work.) But as fun as it may be to peg this as the reason for Abercrombie’s stock slide, it’s not. No, the market was reacting to a sentence buried in Jeffries’ report:

“Costing pressures will be greater in the second half of the year, and macroeconomic uncertainty has increased.”

Just look at how other retail clothing stocks performed on Wednesday: Ann Taylor Stores fell 4.87%. Chico’s was down 2.46%. Macy’s fell 2.4%. Sure, no other retailers fell quite like A&F did on Wednesday. So its Situation stunt probably didn’t help. But clearly, there are bigger market forces at work here than Abercrombie losing the Jersey Shore demographic. Though, considering the firm’s well-documented WASPy-ness, could the market be punishing it with a discrimination discount?