After a 43% decline year-to-date, at the current price of around $20 per share, we believe Abercrombie & Fitch’s stock (NYSE: ANF), a specialty retailer selling casual clothing and footwear – is fairly priced. ANF stock has declined from around $35 to $20 YTD, underperforming the broader indices, with the S&P falling about 10% over the same period. The company’s stock traded lower as anxiety over a potential recession, inflation, supply chain challenges, and soaring transportation costs have swept over the entire specialty retail sector. Consumers’ discretionary budgets were shrinking, likely causing them to shift to off-price retail shopping. All of this occurred when the U.S. household savings rate dipped to a low of 5.1% in June’22. However, Q1 2022 sales were well above Q1 2019 due to the highest average unit retail (AUR) in the Abercrombie brand’s history. Further, the company launched its first line of activewear, Your Personal Best, in order to capitalize on the growing but competitive activewear market. While ANF expects its freight and materials costs to remain elevated in the near term, the company is still betting on its growing AUR and fresh momentum in the new line of activewear in the longer term.
In Q1 2022, ANF managed to grow sales 4% year-over-year (y-o-y) to $813 million, despite difficult comps related to lapping government stimulus and China lockdowns. However, the retailer did see meaningful gross margin compression of more than 800 basis points to 55.3% in Q1, driven by higher freight costs and accelerated sell-through of holiday inventory. Consequently, the company trimmed its FY2022 operating margin outlook down to 5% to 6% from 7% to 8% previously, setting the company up for a significant decline in earnings y-o-y.
ANF recently informed investors that it expects FY 2025 revenue of $4.3 billion and operating margins of 8%, which would justify a stock price increase. These targets may seem lofty, especially in light of today’s challenging environment, but these goals aren’t completely unrealistic if the company’s momentum continues in the activewear category.
We have revised ANF’s valuation to $20 per share, based on a $2.07 expected EPS and a 9.8x P/E multiple for the fiscal year 2022 – almost 40% higher than the current market price. We forecast ANF’s Revenues to be around $4 billion for the fiscal year 2022, up 2% y-o-y. There is uncertainty in the market at the moment due to rising interest rates and the threat of recession. However, any further decline in the stock could present a buying opportunity.
With inflation rising and the Fed raising interest rates, Abercrombie & Fitch has fallen 43% this year. Can it drop more? See how low can ANF stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||4%||-10%||92%|
|Trefis Multi-Strategy Portfolio||8%||-7%||268%|
 Month-to-date and year-to-date as of 8/16/2022
 Cumulative total returns since the end of 2016
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