Note: ANF’s FY’22 ended on January 28, 2023.
After almost a 139% growth year-to-date (and a 40% rise over last month), at the current price of around $55 per share, we believe Abercrombie & Fitch’s stock (NYSE: ANF), a specialty retailer selling casual clothing and footwear – is fairly priced. ANF stock has increased from around $40 to $55 over the last month, outperforming the broader indices, with the S&P falling slightly over the same period. The fiscal year 2023 began with low expectations for the retailer. It was only expected that net sales would grow by 1% to 3% year-over-year (y-o-y) in FY’23. However, the business has so far exceeded those expectations. Additionally, Abercrombie’s profits are significantly higher than expected. In Q2 (ended July), the company had an operating margin of 9.6%, significantly exceeding its original guidance of 4% to 5% for the full year. The company’s management raised its guidance after its Q2 results. As opposed to the high end of the original guidance, the company now expects net sales to grow 10% this year. Moreover, it expects a full-year operating margin of 8% to 9% – double what it was expecting earlier this year. In light of this, we believe the gains realized by the stock have been well deserved.
Notably, ANF stock had a Sharpe Ratio of 0.7 since early 2017, which is higher than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
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In Q2 2023, ANF managed to grow sales by a strong 16% year-over-year (y-o-y) to $925 million, driven by particular strength in its Abercrombie brand. Comparable sales across the company gained 13%, and gross profit soared as a result of lower freight costs. Geography-wise, the company’s comparable sales in the Asia-Pacific region increased by 26%, helped by the reopening of China. Its core Americas segment also had strong comps growth of 14%, which helped to offset slower growth in Europe, the Middle East, and Africa. Hollister, the largest brand by revenue within the portfolio, saw single-digit gains. In contrast, the Abercrombie brand produced most of the revenue increase, thanks to its strong student demographic and strong growth in its women’s business. With the parent brand closing in on Hollister as the biggest revenue generator, the sales mix is undergoing a noticeable shift. In addition, the company’s net income soared, with earnings more than tripling from year-ago levels to $1.10 per share.
We have revised ANF’s valuation to $56 per share, based on a $4.36 expected EPS and a 12.9x P/E multiple for the fiscal year 2023 – in line with the current market price. We forecast ANF’s Revenues to be around $4.1 billion for the fiscal year 2023, up 10% y-o-y.
|S&P 500 Return||0%||17%||101%|
|Trefis Reinforced Value Portfolio||-1%||30%||569%|
 Month-to-date and year-to-date as of 9/6/2023
 Cumulative total returns since the end of 2016
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