This fashion company’s story reads like a Wall Street fairy tale…
It was a star of early-2000s malls, whose preppy styles and high prices eventually fell out of favor with shoppers - but recently, it has pulled off the rarest of retail comebacks. Over the past year, it has become one of the U.S. stock market’s strongest performers - up 387%, with its shares roughly doubling the 177% returns of Nvidia (NVDA), the AI chip company that has led the market's rally over this time frame.
That Cinderella stock is Abercrombie & Fitch (ANF), which currently trades at $170. Let’s take a look at how its years of hard work of reinventing itself have paid off big in the stock price.
Abercrombie’s Comeback
The retailer once prided itself on being an exclusive brand that sold logo-adorned polo shirts to “cool and popular kids.” While this type of branding worked in the early 2000s, it soon stopped yielding results, and ultimately turned into a disaster for the company (along with a CEO that made major mistakes).
ANF stock traded in the single digits as recently as 2020.
Abercrombie & Fitch started its turnaround when Fran Horowitz took over as CEO in 2014, and rebranded both its Abercrombie & Fitch and Hollister labels. It now markets its namesake brand to millennial and Gen Z shoppers in a variety of sizes. The retail chain offers stylish clothing that can be worn at work, at home, or at social events. The Hollister brand caters to today’s teens, and also has an activewear brand under its umbrella, Gilly Hicks.
The turnaround is hugely successful.
Last year, while other apparel retailers were saying that discretionary spending had softened, Abercrombie & Fitch grew its top line by a whopping 16%. Even this year, the company remains an outlier among its peers; it expects annual net sales growth of 10%.
After the impressive first-quarter results, which included sales above company expectations, CEO Horowitz said, “Growth was broad-based across regions and brands with Abercrombie brands (including Abercrombie Kids) registering 31% growth and Hollister brands delivering growth of 12%. Strong top-line growth, along with gross profit rate expansion, led to record first quarter operating income and an operating margin of 12.7%. With excellent first quarter performance, we are increasing our full year sales and operating margin outlook.”
Management updated its financial sales target for the 2026 fiscal year after exceeding its initial goals set at its June 2022 investor day. The company now is targeting sales of $5 billion.
Abercrombie's Success Should Continue
I expect Abercrombie to sustain its momentum this year, even if consumers tighten their belts.
Its on-trend and well-fitting products are a big reason for that. Another is management’s smart inventory strategy, which has allowed Abercrombie to make the most of its revived popularity.
Jane Hali & Associates (JHA) is a retail, brand research and consulting company. It says that Abercrombie now offers more tailored offerings, like its Sloane women’s trousers, and “core” items, which includes basics such as T-shirts, button-downs, and separates. This makes the retailer less dependent on seasonal items that are more likely to be marked down.
The company began managing its inventory more tightly after pandemic lockdowns closed stores temporarily in 2020. ANF quickly realized it could be more productive with less inventory by working with vendors on quickly “chasing,” or ordering styles that are selling well. Depending on the category, Abercrombie now places orders a few months, or even just several weeks, in advance. This is vastly different from the traditional industry standard of ordering about nine months ahead of time.
The company’s CFO, Scott Lipesky, summed it up perfectly for the Financial Times: “The customer is moving quicker than ever, the industry moves quicker than ever, and therefore your inventory process has to be as agile and nimble as ever.”
Shedding the weight in terms of excess inventory led to Abercrombie reporting fewer promotions in the first quarter. This helped the company raise its gross profit margin from 61% a year earlier to 66.4%.
What Comes Next for ANF?
So, what comes next for the company?
After re-establishing itself here in the United States, Abercrombie is now looking to make a stronger push overseas. Its business in Europe and Asia combined represented less than 20% of its net sales in the first quarter, but grew even faster than its U.S. business - 22% to 23% versus 21%.
The company is now building teams in Shanghai and London to “localize” its assortment of clothing. I expect overseas sales to accelerate even more, and outpace U.S. sales.
But even here in its home market, I expect Abercrombie & Fitch to continue to outshine its peers. It is gaining brand momentum, even as the U.S. consumer faces growing headwinds. In particular, the company is seeing significant momentum in its Abercrombie brand, which is resonating with younger generations and millennials.
ANF stock is a buy below $185.
