What’s Next For ANF Stock After 47% Gains In A Month?

Note: ANF’s FY’23 ended on February 3, 2024.

After a 102% rise since the beginning of the year (and a 47% growth in a month), at the current price of around $178 per share, we believe Abercrombie & Fitch’s stock (NYSE: ANF), a specialty retailer selling casual clothing and footwear, is fully valued after a strong run. ANF stock has increased almost 6x from around $31 to a whopping $178 over the last year, outperforming the broader indices, with the S&P growing about 25% over the same period. Notably, ANF’s peer American Eagle Outfitters (NYSE: AEO) has seen its stock rise over 2x in the last twelve months to around $24. To begin with, ANF’s FY’23 earnings came in significantly higher than expected at $6.22 per share compared to mere 5 cents in FY’22. Its operating margin also grew from 2.4% in FY’22 to 11.5% in FY’23. The gains came as ANF reported stellar results in its high-margin namesake unit and better-than-expected momentum in its Hollister brand. To add to this, ANF started FY’24 on a strong note as well. Abercrombie was expected to earn $1.73 per share on  $963 million in sales in the first quarter (which is a seasonally low quarter). Instead, it earned $2.14 per share and generated more than $1 billion in sales. It should be noted that ANF trades at a P/E ratio of 22x when comparing the company’s current market cap with net income derived from the company’s FY’24 guidance. We believe that this valuation is excessive both in terms of absolute and comparative terms and will likely be difficult to sustain at the current elevated growth rate in the near future. That said, the apparel sector is a highly discretionary category, suggesting a high level of sensitivity to macroeconomic conditions.

ANF stock has seen extremely strong gains of 800% from levels of $20 in early January 2021 to around $178 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. However, the increase in ANF stock has been far from consistent. Returns for the stock were 71% in 2021, -34% in 2022, and 285% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that ANF underperformed the S&P in 2022.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ANF face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

In Q1, ANF grew sales by a strong 22% year-over-year (y-o-y) to $1.02 billion driven by 21% growth in comparable sales across the company. The company benefited from good pricing management and the right product assortment. In terms of revenue, Hollister saw 12% gains and the namesake brand saw 31% y-o-y growth in Q1 – thanks to its strong student demographic and growth in its women’s business. A robust top-line growth, along with gross profit rate expansion of 540 basis points to 66.4% – led to an operating margin growth of a record 860 basis points y-o-y to 12.7%. Consequently, the company’s GAAP EPS came in at $2.23 compared to a mere 33 cents a year ago. It is worth mentioning that while Abercrombie continued its impressive multi-quarter growth trend, Hollister delivered a fourth consecutive quarter of sales growth. The parent brand has closed on the Hollister brand as the biggest revenue generator for the first time in FY’23. In the Q1 call, management raised guidance for FY’24. It now expects sales to reach about $4.7 billion (10% above FY’23), and operating margins to reach 14%. This represents an operating profit of about $560 million.

We have revised ANF’s valuation to $156 per share, based on a $8.37 expected adjusted EPS and a 18.6x P/E multiple for the fiscal year 2024 –  almost 12% lower than the current market price. We forecast ANF’s Revenues to be around $4.6 billion for the fiscal year 2024, up 8% 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.

[1] Returns as of 5/31/2024
[2] Cumulative total returns since the end of 2016