Why Abercrombie & Fitch Looks Fairly Valued

Abercrombie & Fitch’s (NYSE: ANF) stock has lost a sizable chunk of its value since the beginning of 2019 with the company’s share price shrinking from $21 in January to around $18 now. Negligible revenue growth owing to flat comparable sales have primarily weighed on the company’s share price over the year. Moreover, the company’s losses also widened due to asset impairment and flagship store exit charges. However, we believe that the market has already priced in all these factors in Abercrombie & Fitch’s valuation which looks appropriate at its current level of around $18 a share. Our price estimate takes into account the most recent earnings as well as the company’s guidance.

Abercrombie’s net sales remained flat at $863.4 million in Q3 2019 (ending November 2) while EPS fell 70% year-over-year to $0.10. This decline can be primarily attributed to a $13 million asset impairment charges incurred during the quarter. For the full-year 2019, Abercrombie expects net sales to be flat to up 1% while comparable sales are expected to be in the range of 0-1%. Gross profit margin is expected to be down approximately 100 basis points while operating expenses are projected to increase by 2-3%.

Below we provide a detailed explanation of the key factors that could impact the company’s valuation:

#1 Abercrombie’s Future Growth Prospects Hinge On Hollister 

• Hollister has been Abercrombie’s fastest-growing brand.
• Hollister has added $313 million to the company’s top line since 2016 at an average annual rate of 8.2%.
• As a result, Hollister’s contribution to Abercrombie’s total revenues has increased from 55% in 2016 to 60% in 2018.
• This growth has been driven by strong performance across genders and channels. Moreover, the brand has continued to benefit from a growing customer base for its swimwear and intimates categories.
• However, the brand’s performance over the first 3 quarters of 2019 was soft, with the brand’s total revenue witnessing a growth of just 1%.
• Additionally, the brand’s comparable sales have remained flat due to soft showing in international markets.
• Despite these headwinds, we expect the brand to end the year on a high due to strong gains over the holiday season and report a record $2.24 billion in revenues for FY 2019.
• Hollister should continue to drive the company’s growth over the foreseeable future.

#2 Digital Channel Continues To Thrive

• Digital (e-commerce) channel has been pivotal to Abercrombie’s growth over recent quarters. There has been a fundamental shift from brick-and-mortar to the online platform and Abercrombie has invested heavily in growing its Direct to Consumer (DTC) segment to adapt to this change.
• The company’s strategy is yielding results, as evidenced by the fact that the digital channel has continued to achieve double-digit growth over the last few quarters.
• Going forward, we expect the DTC segment to be the key driver of the company’s top-line growth as the company continues to invest in its omnichannel capabilities.

#3 Struggling International Business Is A Cause For Concern

• Abercrombie’s year-to-date international comps have been negative 5%, with year-over-year sales declining by 6% to $842 million as macro headwinds in key markets, including the uncertainty around Brexit, continues to negatively impact sales in the UK, which is Abercrombie’s largest international market.
• Moreover, ongoing protests in Europe and Asia also negatively impacted the company’s results.
• In sharp contrast, Abercrombie’s US business has been robust with the company’s year-to-date revenue growing by 3% and comparable sales witnessing an increase of 3%.
• Given the fact that uncertainty around Brexit and protests across Hong Kong have failed to recede, we expect the uncertainty will continue to weigh on the company’s performance in Q4 2019.

Per Trefis estimates, Abercrombie’s adjusted EPS for 2019 is likely to be $0.73. Taken together with a P/E multiple of 24.5x, this works to a fair value of $18 for Abercrombie & Fitch’s stock. which is similar to the current market price.

We highlight how Abercrombie’s P/E multiple has trended over the years, and compare this key metric with that for its peers L Brands, Gap, and Urban Outfitters in our interactive dashboard.

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