Abercrombie & Fitch: Buy, Hold, or Sell?

Now might be a good time to look at Abercrombie & Fitch (NYSE: ANF  ) . Why? For a few reasons:

  • The stock is now trading at $36.75 versus its 52-week high of $77.49.
  • The company is expected to report Q2-2012 earnings on August 15, when several positive catalysts are expected to be announced.
  • The company recently announced a restructuring plan at the Deutsche Bank conference.
  • An aggressive stock buyback by management might be a reality in the near term.

Abercrombie & Fitch has four brands, namely:

  1. A&F: Abercrombie & Fitch, which is rooted in East Coast traditions and Ivy League heritage. A&F is the essence of privilege and casual luxury.
  2. A&F for Kids: Casual, with classic, preppy style, Abercrombie kids aspire to be like their older sibling, Abercrombie & Fitch.
  3. Gilly Hicks: Gilly Hicks is the cheeky cousin of Abercrombie & Fitch. Inspired by the free spirit of Sydney, Australia, Gilly Hicks is the All-American brand for intimates.
  4. Hollister: Hollister is all about hot lifeguards and beautiful beaches. Young and fun, with a sense of humor, Hollister never takes itself too seriously.

At the end of Q1 2012, A&F had a total of 1049 stores, out of which 107 were non-U.S. based.

Stock valuation
ANF shares reflect a weak environment in Europe, a weak global spending environment, and a lack of visibility with the new restructuring plans announced. The stock is currently trading at 10.5 times consensus EPS estimate of $3.375 versus its closest competitor American Eagle Outfitters (NYSE: AEO  ) , which trades 16.8 times, and Aeropostale (NYSE: ARO  ) , which trades 15 times. ANF also trades at a discount to the less obvious retailers Gap and Urban Outfitters. It's tough to make huge bets on teen retailers in this environment, but given where the stock is trading and the possible short-term catalysts that will be announced in the Q2-2012 conference call, this one is worth the attention.

Low barriers to entry and the weak economic environment
We do believe that A&F now competes with companies such as Wal-Mart, Costco, and Target as consumers cut back on spending given the weak global economic environment. The reason we don't put them all in the same peer group as the 3 A's (Aeropostale, American Eagle, and A&F) is that their product line consists of other products in addition to clothing, and we define Wal-Mart, Target, and Costco as big-box discount retailers. Others in the peer group, though, are Forever 21, H&M, and Topshop.

A gloomy back–to-school inventory
Although ANF is now stocked with back-to-school inventory, the selection of inventory is a real bummer. Heavy items such as wool blazers and sweatshirts just do not sell in June, July, and August. We did a channel check recently, and these items are already discounted at 30%-40%, which will have a significant impact on ANF margins, which have been on a steady decline. Also, we saw additional 75% off clearance items, which is rare for this time of the year, when we never see discounts more than 50%. All in all, the product hasn't changed year over year, which doesn't give the consumer the incentive to rush to A&F instead of shopping at multi-brand retailers such as Target and Wal-Mart.

On a positive note
Management has made statements on benefits realized with the reduction of cotton prices. Although we need more details on the pricing and how it would impact EPS and margins, this could be a positive for earnings.

A&F plans to close 180 stores by end 2015. Cost-cutting is definitely something we like here, but once again, we need more color on why these stores are being closed. Are they losers, are the leases expiring, or is management just preparing for a further cut in global consumer spending?

A&F has a strong balance sheet with $322 million in cash and no public debt. On July 22, 2012, A&F entered into a new $350 million unsecured credit agreement. As off end Q1-2012, there was $0 outstanding under the credit agreement, and the company was not in violation of any covenants. The credit agreement can be used for working capital and general corporate purposes, which gives the company a lot of flexibility. Additionally, in February 2012, A&F entered into a $300mm term loan agreement, which has been unused as off Q1-2012.

Last but not least, if management is expected to be aggressive with stock-buybacks, it's a good sign. Maybe management believes the stock is undervalued.

In conclusion, we look at this as a great opportunity to follow a company with a solid balance sheet, possible short-term positive catalysts if management plays their cards right, and an undervalued stock in the retail space.

Performance relative to the SPDR S&P Retail ETF. Click through to use more of Kapitall's free tools:

Compare average analyst ratings for the companies listed below using Kapitall's Compar-O-Matic.

(Click here to access free, interactive tools to analyze these ideas.) 

Written by Sabina Bhatia.

The Motley Fool owns shares of Aeropostale and Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Costco Wholesale. Motley Fool newsletter services have recommended creating a bull call spread position in Wal-Mart Stores. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1964285, ~/Articles/ArticleHandler.aspx, 10/24/2016 5:08:30 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:03 PM
ANF $15.75 Up +0.01 +0.06%
Abercrombie and Fi… CAPS Rating: *
AEO $17.66 Up +0.16 +0.91%
American Eagle Out… CAPS Rating: ****
AROPQ $0.04 Up +0.00 +2.99%
Aeropostale CAPS Rating: *