When I picked Abercrombie & Fitch (NYSE: ANF ) last year as a Halloween treat, there was a lot of "watchootalkinboutWillis?"
The company was just coming off some disappointing comps, and few thought they would get it together. I figured they would. And moreover, I figured there would be plenty of time to wait for that to happen, given the firm's strong balance sheet and free cash flow. Well, it turns out you really didn't have to wait that long. Amazing sales numbers started pouring in not long after. The stock is up a solid 35% since then, and that's after a major drop from the $70s just a few weeks back.
Going to the same bucket
So this year, I'm going back to the same candy dish. Hey, if there was an old lady on your block handing out jumbo Heath Bars while everyone else was tossing a single Starburst your way, I think you know where you'd take your trick-or-treating business. (Here's a naughty tip: Carry a couple extra costumes so you can hit the good ones multiple times!) Of course, such behavior would be sleazy in the world of socially sanctioned door-to-door groveling. But you need have no qualms about revisiting the good ones in the stock market. And I'd argue that Abercrombie's got some pretty sweet returns for investors from here.
Let's start with the brand. Brands are all-important with the 15-to-25ish market that Abercrombie serves, and when it comes to the clothes kids gotta have, Abercrombie is it. If you can't figure that out by simply reading the T-shirts at a local high school football game, you can get it from official sources. Bot Abercrombie subsidiary Hollister and Abercrombie itself recently scored 1 and 2 on a Piper Jaffray survey of teen brands. Formerly popular companies such as Motley Fool Stock Advisor pick Gap (NYSE: GPS ) were far off in the rough.
Top-line flood
Abercrombie's sales have continued to soar. In July, they rose a mere 33%, with comps growth of 22%. In August, they jumped 36% on 24% comps. In September, a 31% rise with 21% comps.
And if you can stand a bit of a rerun from my Abercrombie bull argument a few weeks back, keep in mind that Abercrombie's margins are among the best in the biz.
|
Margins, last fiscal year
|
Gross
|
Operating
|
Net
|
|
Abercrombie & Fitch
|
45%
|
17.2%
|
10.7%
|
|
Gap
|
39.2%
|
11.5%
|
7.1%
|
|
Aeropostale (NYSE: ARO )
|
33.2%
|
14.1%
|
8.6%
|
|
Urban Outfitters (Nasdaq: URBN )
|
40.9%
|
17.9%
|
10.9%
|
|
Industry Average
|
36%
|
6.1%
|
3.6%
|
That produces good fallout for the bottom line -- most recently, a 34% increase in earnings per share for the quarter ended in July, on top of a 38% uptick for the quarter before that.
Keeping it coming
Lest you think that Abercrombie's future fortunes are completely reliant on fickle teens, consider Ruehl, the new concept it's just rolled out. This upscale boutique aims to capture the Abercrombie generation after it emerges from the far end of the original demographic pipe. By leveraging its existing relationship with customers as they move through years 25-35, Abercrombie will have an excellent new market opportunity to drive growth for years to come.
Ghoulish bottom line
By my conservative estimates of upcoming free cash flow, I think Abercrombie's shares are, at worst, fairly valued around $50. But if we believe the company can manage to hit the 17% earnings growth analysts estimate for the next few years, I think they're currently worth closer to $65 each. And much as I hate to agree with the Street, I think Abercrombie is capable of hitting that mark, if not surpassing it. So if you missed out last year, consider taking a bite now. And if you got yours then, don't toss it aside. This is one treat that keeps on giving.
For related Foolishness:
Seth Jayson never tried that costume trick. He swears. At the time of publication, he had shares of Aeropostale but no positions in any other firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.
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