Is Abercrombie a Trendy Play?

With shares of Abercrombie & Fitch Co. (NYSE:ANF) trading at around $52.48, is ANF an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Are you cool enough to shop at Abercrombie? No, seriously, are you the coolest person you know? At least one of the coolest? Like Top 3 Cool? If you’re not fit, gorgeous, and as close to perfect as you can get, then don’t even bother walking through those doors. You know those Abercrombie doors in the mall – the ones where you can hear the music pumping, but you can’t really see inside. Abercrombie is similar to a nightclub, where you must dress cool enough to enter. Only in this case, you must pass your own test, as opposed to impressing the guy at the door. You must answer those difficult questions. Are you young enough? Are you stylin’? Are you fit? Are you hot?

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Okay, so there was a little facetiousness above, but it’s aimed to be at least a little more interesting than where the company headquarters is located (New Albany, OH) and how many employees the company has (10,000). It should also be noted that the story about Abercrombie not selling plus-size clothing for females originated about seven years ago. The story is making waves again because of social media sites like Twitter.

The company’s approach still has the potential to backfire, but we’ll get to that in the Conclusion section. For now, let’s take a look at the many positives for Abercrombie:

  • Consistent improvements in revenue and earnings on an annual basis
  • Fewer promotions
  • Good cash flow
  • Improved inventory management
  • Quality debt management
  • Solid margins
  • Fair stock valuation
  • Increasing vendor collaborations
  • Effective loyalty program
  • Strong social media presence
  • Analysts like the stock: 14 Buy, 16 Hold, 1 Sell
  • 1.60 percent yield
  • Improving average unit retail (AUR)
  • Improved customer engagement

Of course, what has brought Abercrombie back into central focus was the upgrade by Wells Fargo & Company (NYSE:WFC) analyst Paul Lejuez. He stated, “The company has done all the right things in managing its business recently, in our view. With trends now stabilizing, we believe there is significant room for EBIT margin improvement, driven by the U.S. business. Internationally, we believe Abercrombie’s opportunities remain attractive, led by mall-based Hollister. With the highest free cash flow in our universe, we believe the company is likely to begin actively returning cash to shareholders, which could provide a catalyst for the stock.”

He also set a price target of $56 to $60.

On the negative side, Abercrombie hasn’t seen great online results over the past months. Over that time frame, pageviews-per-user has declined 13.60 percent, time-on-site has declined 11 percent, and the bounce rate has increased 10 percent.

Now let’s take a look at some numbers. The chart below compares fundamentals for Abercrombie, Aeropostale (NYSE:ARO), and American Eagle Outfitters (NYSE:AEO). Abercrombie has a market cap of $4.04 billion, Aeropostale has a market cap of $1.15 billion, and American Eagle has a market cap of $3.74 billion.

ANF

ARO

AEO

Trailing   P/E

18.15

34.05

16.58

Forward   P/E

12.71

20.05

11.32

Profit   Margin

5.25%

1.46%

6.68%

ROE

12.64%

8.52%

20.02%

Operating   Cash Flow

$684.17 Million

 $144.81 Million

   $475.05   Million

Dividend   Yield

1.60%

N/A

2.30%

Short   Position

7.20%

N/A

3.10%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong   

The debt-to-equity ratio for Abercrombie is stronger than the industry average of 0.50.

Debt-To-Equity

Cash

Long-Term Debt

ANF

0.04

$643.51 Million

$63.94 Million

ARO

0.00

$231.50 Million

$0

AEO

0.00

$630.99 Million

$0

 

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T = Technicals Are Strong   

Abercrombie had been underperforming the market as well as the industry for a while, but upward momentum has returned as of late.

1 Month

Year-To-Date

1 Year

3 Year

ANF

7.82%

9.89%

9.07%

40.66%

ARO

9.68%

14.07%

-28.27%

-45.54%

AEO

1.59%

-5.19%

6.48%

43.11%

 

At $52.48, Abercrombie is trading above all its averages.

50-Day   SMA

47.65

100-Day   SMA

48.27

200-Day   SMA

42.22

 

E = Earnings Have Been Strong            

Revenue and earnings have increased for three consecutive years.

2009

2010

2011

2012

2013

Revenue   ($)in   billions

3.48

2.93

3.47

4.16

4.51

Diluted   EPS ($)

3.05

0.00

1.73

1.61

2.85

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and earnings.

1/2012

4/2012

7/2012

10/2012

1/2013

Revenue   ($)in   billions

1.33

921.22M

951.41M

1.17

1.47

Diluted   EPS ($)

0.41

0.03

0.19

0.87

1.83

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Trendy apparel stores have done a relatively good job of impressing investors in a difficult economic environment. However, the strength of the consumer is still questionable. The unemployment rate for teens is higher than normal, household incomes have declined, taxes are likely to increase, and government cuts are a strong possibility.

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Conclusion

Abercrombie is known as the epitome of cool – to some crowds. However, this does have the potential to backfire. If Abercrombie begins to look like a place where the superior crowd shops, then it will no longer be seen as cool. It would present an opportunity for an anti-Abercrombie retailer – a store that allows all shapes and sizes to shop and states/markets that being cool is about much more than fit bodies and pretty faces.

Regardless of whether you desire to be in the Abercrombie clique or not, it’s a fact that Abercrombie performed very poorly in 2000 and 2008. On both occasions, it got to the point where the company’s survival was in question. With that in mind, while there are a lot of tailwinds for Abercrombie at the moment, is its long-term game plan sustainable? If the market suffers another steep decline, is Abercrombie a place you want to be? Then again, after the upgrade, there is upside potential in the near-term.

All factors taken into consideration, Abercrombie is a WAIT AND SEE.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.

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