Abercrombie & Fitch (NYSE: ANF), a specialty retailer selling casual clothing and footwear, became vulnerable during the pandemic due to its nonessential product assortment. While ANF’s stock slid sharply during the early months of the pandemic, it has recovered from the March lows of $8 and is now 40% higher than the beginning of 2020 – thanks to the better-than-expected Q3 and the vaccine-related boost. So, is it a good time to enter the stock at around $24? We think not and believe that the stock is now appropriately valued at the current price for the near term.
This is taking into account ANF’s revenues which have declined 18% year-over-year (y-o-y) so far. Also, the clothing retailer’s revenue grew marginally in fiscal 2019, as compared to a 3% growth in the previous year. The Abercrombie name sake brand revenues have stagnated over the years, and hence the company has scaled it back and expanded its higher-growth Hollister brand. But still the clothing retailer saw its markdowns hurt its gross margin, while store closures, renovations, and new marketing campaigns reduced its operating margins in 2019. All this indicates that the retailer could likely get back to its slow pace of growth once the Covid threat abates. Our dashboard, ‘What Factors Drove 38% Change in Abercrombie & Fitch Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.
Abercrombie & Fitch’s revenues grew roughly 3.7% 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 period. While the company’s P/S has now increased to 0.4x, the stock seems to be fully valued, when the current P/S is compared to levels seen in the past years.
How Is Coronavirus Impacting ANF Stock?
Abercrombie & Fitch reported better-than-expected fiscal third quarter results, which ended on Oct. 31. The company’s sales however, dropped 5% y-o-y, including a 7% drop in sales at the company’s Hollister brand, and a 2% drop in sales at Abercrombie. In addition, its digital net sales jumped 43% during the same period. With a furloughed workforce and reduced occupancy expenses, Abercrombie & Fitch counterintuitively gained some leverage thanks to these strong e-commerce sales. It reported net income of $42.3 million, or $0.68 per diluted share. This was a sharp improvement from last year when it reported only $6.5 million of net income.
Going forward, the company revised its fourth quarter forecasts upward from a 5% to 10% dip in sales compared to Q4 2019, to a 5% to 7% drop in its most recent update. The company commented that the improvement reflects an ongoing digital momentum which has partially offset the store closures and capacity restrictions in North America and EMEA (Europe, Middle East, Asia) regions.
While ANF seems to be overvalued now, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Amazon vs Etsy.