It's been so long since I've written about Abercrombie and Fitch (ANF); Sears was still a public company. However, when I read the other day that ANF is the new Aritzia (ATZAF) with the younger crowd, I couldn’t resist checking it out.
To my surprise, ANF was in 11th position on Barchart’s Top 100 Stocks to Buy list, with a share price up 127% in 2023 and 258% over the past year.
That’s a big run for a company that’s had its ups and downs over the years. The company began as an Eddie Bauer/LL Bean-like sporting goods store in the late 1800s.
It got into hot water in the mid-2010s by recruiting staff based on physical attractiveness. By 2017, its shares were trading below $10 and ready for the bankruptcy bin.
It hired Fran Horowitz, its President and Chief Merchandising Officer, in February 2017, and it’s been off to the races. Since Horowitz took the top job, ANF has appreciated by 345%.
Abercrombie’s stock once traded near $90 in the mid-2000s. I’m sure shareholders would love to see that happen.
My question is: Is ANF a top 100 stock to buy … or sell?
It’s Earned These Gains
Without good reason, you don’t double or triple in price over 12 months. The markets are a bunch of things. Rational is one of them. Things happen for a reason.
When Horowitz took over, Abercrombie had just finished a fiscal year that included $3.33 billion in revenue and an operating profit of just $4.4 million. Over the next five fiscal years, its operating profit varied from $336.9 million (sales of $3.71 billion) in 2021 to a low of $33.2 million (sales of $3.13 billion) in 2020. But generally, they’ve averaged between $100 million and $200 million over her six-year tenure.
So, she’s kept it profitable during some tricky times during the pandemic and has grown sales in most years.
In Q2 2023, its same-store sales grew by 13%, while its overall revenue was up 16% to $935 million. Its gross profit was 62.5%, 460 basis points higher than a year ago, while its non-GAAP operating profit was $89.8 million, up from a $992,000 loss in Q2 2022.
It did that with higher sales, gross margins and controlling its operating expenses. For example, its marketing expenses were 15.4% of net sales in both years. That alone adds several million to the operating profit. That will take it over $4 billion for only the fourth time in its history.
ANF expects 10% sales growth for the year, more than 3x its previous estimate of 3% at the midpoint of its guidance. Based on an 8.5% operating margin, its profit will be $346 million, the highest since Horowitz became CEO.
There’s no question that Abecrombie’s business is rolling at the moment. Gross margins of nearly 63% will do that for you. However, historically, it has generated gross margins in the 60s, so it’s not out-of-the-park good.
Its Valuation Is High
ANF’s market cap of $2.7 billion is 0.70x sales, the highest in the past decade. Its enterprise value of $3.14 billion is 13.5x EBITDA, the highest in the past decade.
Both are warning signs that buying at $53 could set you up for a lot of future pain.
One of its biggest rivals over the years is American Eagle Outfitters (AEO). Its market cap of $3.3 billion is 0.66x sales, while its enterprise value of $4.49 billion is 9.8x EBITDA, or 27% lower than ANF.
However, I don’t think there’s any question that Abercrombie’s a much better retailer. It has a better growth profile, margins, and a better balance sheet than AEO, so it should have a higher multiple.
On Aug. 21, Barchart contributor Jim Van Meerten discussed whether ANF was overpriced. While the technical indicators all screamed buy, the fundamentals and analyst opinion suggested that it was fairly priced to over-priced.
What’s a guy or gal to do?
The Verdict
This will sound like a cop-out, but I don’t feel it’s a buy or a sell. Instead, it’s a hold.
It’s my experience that retailers doing well financially and in their share price tend to keep doing well until something or someone knocks them off stride. Right now, the only thing that could stand in the way of more good news is a recession that lasts more than a few quarters.
While it doesn’t appear in the cards right now, that can change quickly.
If you don’t own ANF but like its business, I would see if you can’t get a better entry point over the remainder of the year. In the meantime, you might see if any put options to sell could generate passive income while you wait to strike.
If you own it, I’d continue to hold until your reason for buying in the first place no longer applies.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
