I had higher hopes for Abercrombie & Fitch (NYSE:ANF).
Don't get me wrong, Q4's 18.4% revenue increase and 18.9% jump in EPS represents the kind of growth that can get investors excited, and investors have already been high on the stock for a while. Merely meeting the high end of estimates in a market that's clamoring for the old "beat" game probably explains the slow dribble in share price since the news hit the wires.
It didn't help that management gave guidance for flat comps for the first half of the year (only slightly better than the recent trend) and predicted low double-digit earnings growth, owing to higher store opening costs and the return (gasp) of normal tax rates.
Let's get a little context on that big old wage increase that the biz press has been blabbing about for Abercrombie. Six million dollars for the second half of this year might sound like a lot of money to the likes of you and me, but, annualized, it represents 1% of Abercrombie's full-year revenues, or 1.8% of fiscal year 2006 operating profits. That's a bite, no doubt, but it's hardly a lethal wound.
Unfortunately, little nips like that still sting, and with the shares already trading at a steep multiple on pretty juicy (dare I suggest, peak?) margins, there's not much of a tolerance for blood loss. As you can see for yourself at our breakdown of the raw, fourth-quarter numbers here, operating margins are already trending downward.
The worry about an upcoming retreat from peaking margins is, in fact, one reason I recently lightened up my position on soaring American Eagle Outfitters (NASDAQ:AEOS). I generally like to grab retailers when their operating margins have begun to flatten out from a drop -- as we may be seeing with Pacific Sunwear (NASDAQ:PSUN), Urban Outfitters (NASDAQ:URBN), and Chico's FAS (NYSE:CHS), for instance. (I like it best when I can get one that's still tanking but already shows signs of an uptick, but in this market, ain't nothing cheap.)
Because of the short-term focus of many investors and traders, I believe Mr. Market may take Abercrombie to the woodshed for a couple of months. But I still think Abercrombie is a long-term winner. Next year's planned capital expenditure spend is in line with the trailing 12 months, and it's targeted at the faster-growing concepts, like Hollister and Ruehl. Given Abercrombie's strong cash flows and returns on investment, I come up with an intrinsic value of about $92 bucks a share.
If I can get a shot at these in the low $70s, I'll probably put a few shares in my own shopping bag.
For more on Abercrombie, check out:
American Eagle Outfitters and Pacific Sunwear are Motley Fool Stock Advisor recommendations.
At the time of publication, Seth Jayson had shares of American Eagle, but no positions in any other company mentioned here. See his latest blog commentary here. View his stock holdings and Fool profile here. Fool rules are here.
