Despite a 20% rise since the March 23 lows of this year, at the current price around $10 per share we believe Abercrombie & Fitch Stock (NYSE: ANF) has more room to go. Abercrombie stock has increased from $8.20 to $10 off the recent bottom compared to the S&P which moved 44% over the same time period. Lower discretionary spending, as well as lower demand for luxury goods, has led to the stock lagging overall markets. However, the stock is down 38% from levels seen in early 2018, over two years ago, and is well below the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the steady rise since the March 23 lows, we feel that the company’s stock still has potential as it will see an upswing in demand as the situation normalizes and its valuation implies it has further to go. Our dashboard, ‘What Factors Drove -37% Change In Abercrombie & Fitch Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.
Some of the stock price rise of the last 2 years (between 2017-2019) is justified by the roughly 3.7% growth seen in Abercrombie & Fitch’s revenues from $3.5 billion in 2017 to $3.6 billion in 2019. This combined with a 5.8% decrease in shares outstanding helped revenue per share surge by 10% from $51 to $56 over the same time period. Finally, Abercrombie’s P/S multiple remained flat at 0.3x over 2017-2019. While the company’s P/S has now decreased to 0.18x, leading to a steep fall in the stock price. The stock seems to be undervalued, when the current P/S is compared to levels seen in the past years – P/S of 0.3x over 2017-2019. We believe the stock is currently undervalued and is likely to see a decent upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak.
How Is Coronavirus Impacting Abercrombie & Fitch’s Stock?
The Coronavirus crisis has hit the apparel industry hard. Fading consumer demand, reduced discretionary spending, and stay-at-home orders resulting in stores remaining closed continue to take their toll on the apparel industry. The effects of Covid-19 were clearly evident in the company’s Q1 2020 (ending April) earnings, with the company’s revenues plunging by 34% y-o-y to $485 million. However, the company has two of the most recognized brands in the apparel industry in the name of Abercrombie and Hollister. Abercrombie & Fitch’s brand appeal and a diversified geographical business should help the company’s revenue to recover. Furthermore, the company has started re-opening its stores which should provide a boost to the company’s revenues as mall traffic returns to normal. Despite the recent store openings, Abercrombie’s revenues are likely to remain suppressed for at least a couple more quarters. Additionally, the ongoing unrest in the US may further impact the company’s revenues, which is the company’s largest revenue driver. To sum things up, although Abercrombie’s revenues are likely to be lower in FY’20, Abercrombie’s stock currently seems undervalued due to its strong underlying fundamentals and brand appeal.
Moreover, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus, which set a floor on fear, the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.
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