Abercrombie & Fitch's (NYSE:ANF) stock has been volatile as management has pursued its strategy to get back to revenue growth. Shares have traded down roughly 30% over the last year, versus a 12% increase for the S&P 500. But recently, the apparel retailer reaffirmed its fourth-quarter guidance, and Wall Street analysts have upgraded their ratings. The company has been working on updating its store base, shopping experience, and marketing strategy. 

For those interested in specialty retail, could it be a good time to consider investing in Abercrombie & Fitch?

Abercrombie top with logo

Image source: Abercrombie & Fitch.

A quick recap of recent performance

In January, Abercrombie reaffirmed its prior fourth-quarter guidance for both net sales and comparable store sales to be flat to up 2%. For the quarter, the company expects its namesake Abercrombie brand to outperform Hollister, which has more international presence and has been weaker lately. 

In its recent earnings report for its fiscal third quarter (which ended Nov. 2), net revenue was up 0.3% year over year at $863.5 million. This was a slight improvement from the 0.2% decrease in the year-ago quarter. Comparable-store sales disappointed, coming in flat versus consensus expectations of a 0.3% increase. U.S. comparable sales were positive but offset by international's 8% decline, on top of a 3% drop in the prior year. The retailer blamed macro headwinds, including Brexit in the U.K. and protests in Hong Kong. The U.K. is the company's largest international market.

What Abercrombie is doing to drive future growth

The company's growth strategy includes an optimized store base, a seamless omni-channel experience, investments in international, and an updated marketing strategy, including loyalty programs. These should be steps in the right direction, and I'll take them one at a time.

Abercrombie is improving the efficiency of its stores while working on a productive omni-channel strategy. The company has opened more stores with short-term leases in order to test locations. It also has nearly 50% of its store leases in the U.S. due for renewal in 2019-2020. Many stores have seen their square footage decreased to improve profitability. The company has stated that it's open to leaving any shopping center while it reassesses its store base. CFO Scott Lipesky said: "We're willing to walk away from any mall at this point. It's about getting the right store in the right location at the right size." With online sales accounting for about 34% of total sales, the retailer can afford to decrease its physical footprint, especially in underperforming locations.

At the same time, the company has improved the consumer experience by adding options to buy online and pick up in stores. It's also made it easier for store associates to help customers locate items in stores with handheld devices.

Marketing updates are working

The company is also making smart marketing moves that resonate with its core consumer group, Gen Z, who value inclusivity and social consciousness. Horowitz commented on the success of Hollister's recent marketing: "Our unique focus on authentically leading with purpose and building confidence is driving record engagement across the brand and helping us connect with teens in a more meaningful level." Hollister ranked as the fourth-favorite apparel brand among teens in Piper Jaffray's fall 2019 "Taking Stock with Teens" survey. That's impressive, because in the spring 2018 survey, Hollister only ranked eighth.

The company's AwesomenessTV series garnered about 24 million views on YouTube and Instagram from April through November 2019. This resulted in a double-digit increase in purchase intent among viewers.

Studying abroad

CEO Fran Horowitz commented on the company's strategic investments in international: "Over the past six months, we have hired regions specific heads for Europe and Asia and have begun to staff our new team." The company expects positive effects from these moves this fiscal year.

Coronavirus (COVID-19) effects on sales and store closures in China could still dampen Abercrombie's international revenue. China makes up the apparel retailer's largest store base in Asia, accounting for over 50% of total stores in the region. This will likely affect Abercrombie's international comparable-store sales in the short term.

Overall, the consumer discretionary company has a solid strategy in place for getting back to revenue growth. It trades at 12 times forward earnings, above rival teen retailer American Eagle Outfitters' 9 times and Urban Outfitters' 11 times. However, American Eagle has had higher revenue growth (6% in the latest quarter, ending Nov. 2) and comparable sales growth (5%).

While the company is moving in the right direction, given the continued risk around international revenue, slower revenue growth vs. competitors, and higher valuation, I would prefer to invest in another specialty retailer or wait for a pullback on Abercrombie.