Abercrombie & Fitch Stock Down 34% LTM, What’s Next?

Note: ANF’s FY’22 ended on January 28, 2023.

After a 34% decline in the last twelve months (LTM), at the current price of around $25 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 $37 to $25 LTM, underperforming the broader indices, with the S&P falling about 7% 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. The retailer did see meaningful gross margin compression of 540 basis points to 56.9% in 2022, driven by higher product/cotton costs and inventory reserves. While its average unit retail (AUR) improved over 2021 levels and remains well above 2019, the growth was not enough to offset the higher costs. Also, the company saw a lack of progress in digital sales as they fell from 47% in 2021 to 44% in 2022. That said, Hollister still faces some significant challenges and its namesake brand still has too much square footage in undesirable locations. In order for the company to succeed in the longer term, it will need to right-size its inventory and maximize same-store sales.

In Q4 2022, ANF managed to grow sales by 3% year-over-year (y-o-y) to $1.2 billion. Hollister, the largest brand by revenue within the portfolio, saw sales fall 4% y-o-y. In contrast, the Abercrombie brand saw a 14% revenue increase, thanks to its strong student demographic and the women’s business achieving its highest quarterly sales ever. With the parent brand closing in on Hollister as the biggest revenue generator, the sales mix is undergoing a noticeable shift.

ANF provided a detailed 2023 outlook, forecasting a 1% to 3% y-o-y revenue increase from $3.7 billion in 2022 – with the Abercrombie brand leading the growth amid a cautiously optimistic demand environment. Geographically, management anticipates the U.S. to continue to outperform international business and forecasts the full-year operating margin to be in the range of 4% to 5%. Management also expects about 200 basis point margin improvements from a net benefit in product costs due to freight savings, partially offset by higher cotton raw material costs. The retailer expects growth to be weighted to the second half of the year, driven primarily by the inclusion of a 53rd week for reporting purposes.

We have revised ANF’s valuation to $25 per share, based on a $1.50 expected EPS and a 16.7x P/E multiple for the fiscal year 2023 – almost in line with the current market price. We forecast ANF’s Revenues to be around $3.8 billion for the fiscal year 2023, up 2% y-o-y.

It is also helpful to see how its peers stack up. Check out how ANF’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 4/20/2023
[2] Cumulative total returns since the end of 2016