Abercrombie & Fitch Co. (ANF) has historically been associated to a luxury lifestyle concept. This specialty retailer operator offers premium casual apparel and accessories for men, women, and children through its brands Abercrombie & Fitch, Abercrombie Kids, Hollister and Gilly Hicks. It operates over 1,057 stores across the U.S., Europe, Canada and Asia. Over the years, the company has based its moat on the high quality of its products and strong brand recognition, wrapped in a unique in-store experience. All of this has allowed its products a good positioning among high-spending young consumers in the U.S. and overseas.
An Upbeat Trend and Improved Earnings Expectations
Disappointing results in sales over the first three quarters 2013 (with a drop of 11.3% on the third) have led to concerns among investors, who found relief in the better-than-expected holiday results. In this period, comps declined only 6%, showing an improvement in relation to the double-digit downturn they had been posting. This outcome also surpassed the company’s earlier forecast of a low two-digit drop for the fourth quarter. Thus, ANF raised its earnings projection for fiscal 2013.
This upbeat trend adds to the aggressive long-term strategies the company is bringing forth to drive top and bottom-line growth in a difficult economic environment. The recession led to high levels of household debt and unemployment, affecting consumers' discretionary spending. This scenario favored price over brand and pushed more aggressive promotional strategies from competitors. Consequently, brands like Hennes & Mauritz AB (H MB), Forever 21 Inc. (FOREVP) and Zara (operated by Inditex (ITX)) provided good-quality fashion at low prices. Nevertheless, the company has achieved a strong fourth quarter-to-date performance and expects its strategic plans to drive significant progress in its business in 2014.
Fewer US Stores and Strong Overseas Expansion
In order to counter the losses at a domestic level, Abercrombie & Fitch has designed a plan that focuses on closing underperforming U.S. stores and expanding its footprint in international markets. To this end, the company has decided to close all its stand-alone Gilliy Hicks stores and continue to offer its products through direct-to-costumer channels, along with its Hollister stores. This brand is responsible for 53% of Abercrombie's total sales and its international expansion is the flagship that will take the company back on an upward trajectory. Abercrombie intends to open Hollister stores in the UAE as well as in Australia and Japan. These developed countries offer great growth opportunities because of their higher discretionary spending-per-capita, which perfectly suits its value-focused products. Moving in this direction, the company planned to open 20 Hollister stores overseas in 2013.
Healthy Balance and Growth Prospects
Abercrombie has a healthy balance sheet with strong cash flow ($257.5 million in cash and cash equivalents at the end of third quarter fiscal 2013) which offers the company financial flexibility for future investments. The company's shares are currently trading at 21.20 its trailing earnings, higher than the industry average of 18.20. Yet its improved fourth quarter-to-date performance and continuous progress on its cost reduction initiatives raised its earnings per share forecast to a range of $1.50 to $1.65 from earlier projections of $1.40 to $1.50. The company’s present return on equity of 13.0 compared to an industry median of 9.0 is also encouraging. And dividends are paying a good 2.26 compared to the industry average of 1.93. Finally, investment Guru Joel Greenblatt (Trades, Portfolio) increased his holdings by 99.88%, backing my bullish feeling about Abercrombie’s future growth.
Disclosure: Vanina Egea holds no position in any stocks mentioned.