Last week, third-quarter 13F filings from the worlds hedge funds and asset management companies were filed and published by the SEC. These reports are always interesting, as it's nice to know what the so-called professional investors of this world are buying.
One thing that stood out within Soros Fund Management's 13F, run by George Soros, was a $2.6 million holding in Abercrombie & Fitch (NYSE:ANF). Now, Soros is traditionally a value investor, so does this mean that after recent declines he considers Abercrombie & Fitch to be a value investment?
A bad year
Abercrombie has not had a good 2013--bad press, inventory mismanagement, and economic headwinds are all factors that have affected the company. As a result, management announced within the company's fiscal third-quarter earnings report that full-year adjusted earnings per share are expected to fall in the range of $1.40 to $1.50, significantly below the $1.95 per share analysts had expected.
Now what investors have to decide is whether or not this is a company-specific issue, or the company is being affected by factors outside of its control. Indeed, there are some factors to suggest that the company's troubles are linked to the global economy as opposed to internal mistakes.
For example, Abercrombie's target market is the younger generation where the unemployment rate is currently higher than average. In particular, the global jobless rate for young people, those aged 15 to 24 -- Abercrombie's key demographic -- has grown to 12.4% from 11.5% during 2007. What's more, in some parts of Europe, especially troubled Greece, youth unemployment levels are close to 75%. This has already lead to Abercrombie delaying its European expansion plans.
Furthermore, the unemployment rate among 16-to-19-year-olds within the United States reached 22.2% during October of this year. So, Abercrombie's key demographic has little money to spend, and what they do have to spend is not going towards expensive clothing.
It would appear that Abercrombie is not alone in reporting lower sales volumes. Peers American Eagle Outfitters (NYSE:AEO) and Aeropostale (NASDAQOTH:AROPQ) are also predicted to report lower sales volumes this year, as teens are no longer prepared to pay premium rates for clothing.
Having said that, American Eagle raised its third-quarter outlook at the beginning of the month on better-than-expected margins, but the company also revealed that sales continued to be "unsatisfactory."
What's more, these third-quarter figures follow a terrible second quarter, where American Eagle posted mid-to-high single-digit declines in same-store sales along with weak traffic figures. Wall Street now expects a 4% decline in sales for the fiscal year 2014.
What about Abercrombie?
So is Abercrombie a value play, as George Soros' position would suggest? Well, some numbers certainly indicate that it is. The company is currently trading at a price-to-book value of around 1.6 and based on a trailing-12-month basis, the company is trading at a P/E of 12.6. This puts the company at the lowest trailing-12 month P/E ratio in the apparel-stores sector, cheaper than both American Eagle and Aeropostale.
This indicates that perhaps Abercrombie could be a value investment, but the issue of falling sales and bad press remains.
Still, unlike some of its peers, the company remains profitable, and trading at one of the sector's lowest valuations means it could be a decent value play. Although a resurgence in youth unemployment would appear to be far off, if the company can survive until then it should be able to ride the economic recovery.