A&F’s Continued Momentum Could Raise Stock Value

Abercrombie & Fitch (NYSE:ANF) is a leading apparel company that primarily targets teens and young adults in the US. It competes with retailers like Aeropostale (NYSE:ARO), Gap (NYSE:GPS), J.Crew Group (NYSE:JCG) and Urban Outfitters (NASDAQ:URBN), and owns apparel brands such as A&F, Hollister and Gilly Hicks.

Abercrombie & Fitch (A&F) recently reported Q3 2010 earnings that demonstrated improvements in its sales metrics and profit margins. We previously discussed the potential upside from improving profit margin and revenue per square foot at the company’s namesake brand stores. (See Abercrombie & Fitch Sales, Profitability Lift Outlook)

Our price estimate for Abercrombie & Fitch stock is $53.54, roughly 6% below market price. We estimate that A&F Stores account for 37% of the company’s stock value compared to 29% for Hollister stores.

November Report Continues Positive Sales Trend

Abercrombie & Fitch reported November sales data earlier this month. Comparable store sales were notably higher for both A&F and Hollister brand stores vs. November 2008. The two brands saw comparable stores up 23% year-over-year (YOY) and up 22% YOY, respectively. Year-to-date, company-wide comparable store sales are up 7% YOY (up 22% YOY in November). ^[1]

The November sales results represent a sharp improvement from YOY trends seen in September and October. In September, the comparable store sales for A&F and Hollister brand stores improved 13% and 9% respectively, ^[2] while October saw comparable store sales up 3% and 2% for the two brands. ^[3]

The sharp rise in November could indicate that consumer spending is gaining steam, a key trend to watch as we await sales reports through the holiday shopping season. The trend is particularly encouraging for up-market brands like A&F that suffered severely during the economic downturn.

A&F Brand Stores – RPSF

Hollister Brand Stores – RPSF

We anticipate increasing revenue per square foot (RPSF) at both A&F and Hollister brand stores through our forecast period, as the economic environment improves and consumer spending returns to pre-recession levels.  We currently forecast that A&F stores RPSF will reach $470 by the end of our forecast period, while Hollister brand stores will breach $400 during this same period.

RPSF is a critical metric in Abercrombie & Fitch’s stock value, and continued growth in comparable store sales in December and 2011 could produce further upside to our estimates. To demonstrate the sensitivity of the company’s stock value to this metric, we estimate that a further $50 increase beyond our base projections through our forecast period (for A&F and Hollister stores) could generate nearly 10% upside to our price estimate for Abercrombie & Fitch’s stock, bringing our number slightly ahead of current market price.

Drag the trend-lines in the chart above to see the impact of various RPSF scenarios on Abercrombie & Fitch’s stock value.

See our full analysis of Abercrombie & Fitch here

1. Abercrombie & Fitch Reports November Sales Results [↩]
2. Abercrombie & Fitch Reports September Sales Results [↩]
3. Abercrombie & Fitch Reports October Sales Results [↩]