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Is Abercrombie & Fitch a Buy Under $40?

Shares of leading specialty retailer Abercrombie & Fitch (ANF) have rallied 86.9% in price year-to-date with the easing of pandemic-driven restrictions facilitating increased foot traffic in retail stores. So, given the company's solid fundamentals and discounted valuation, is ANF worth adding to one's portfolio at its current price level? Let's find out.

Abercrombie & Fitch Co. (ANF) is a multi-brand omnichannel retailer of clothes and accessories for men, women, and children, operating under Hollister, Abercrombie & Fitch, Abercrombie Kids, Moose, Seagull, and Gilly Hicks brands. ANF is headquartered in New Albany, Ohio.

The company's shares have gained 66.7% in price over the past year and 86.9% year-to-date to close yesterday's trading session at $37.92. Its robust top-line growth, driven by improvements across all business segments, has driven the price increase.

The company's continuing efforts to offer quality products and services to its customers have also contributed to its impressive fundamentals and solid growth attributes over the years. Also, with the rising foot traffic in ANF stores due to the holiday season, we think the company could witness promising growth in the coming months.

Here is what could shape ANF's performance in the near term:

Improving Supply Chain

Last month, ANF announced the launch of same-day delivery across all its U.S. stores, including approximately 540 Abercrombie & Fitch, Abercrombie kids, Hollister, and Gilly Hicks stores. To boost its delivery capabilities, the retailer has partnered with Uber, Shipt, Postmates, Roadie, and software supplier Delivery Solutions to allow consumers in specific zip areas to get products from its shops the same day. This endeavor is part of the company's continuing efforts to transform its supply chain, provide capabilities that best fit the demands and preferences of its consumers, and further boost its revenue growth.

Strong Financials and Profitability

During the third quarter, ended October 30, 2021, ANF's net sales increased 10.4% year-over-year to $905.16 million. Its operating income grew 24.1% from its year-ago value to $72.73 million. And the company's net income surged 11.7% from the prior-year quarter to $47.23 million, while its EPS increased 16.7% year-over-year to $0.77 over this period.

ANF's 63.4% trailing-12-months gross profit margin is 77% higher than the 35.8% industry average. Also, its respective ROC, net income margin and ROA are 19.8%, 16.1%, and 46.7% higher than the industry averages. Furthermore, its $427.31 million cash from operations is 132.6% higher than the $183.7 million industry average.

Discounted Valuation

In terms of non-GAAP forward P/E, the stock is currently trading at 7.98x, which is 46% lower than the 14.8% industry average Also, its 0.57x forward Price/Sales multiple is 53.6% lower than the 1.23x industry average. And ANF's 0.68x forward EV/Sales is  is 52.3% lower than the 1.43x industry average.

And the stock's 4.63 x forward EV/EBITDA multiple is 54.9% lower than the 10.27x industry average.

Impressive Growth Prospects

The Street expects ANF's revenues and EPS to rise 21% and 738.4%, respectively, year-over-year to $3.78 billion and $4.66in its fiscal year 2022. In addition, ANF's EPS is expected to rise at an 18% CAGR over the next five years. Moreover, the company has an impressive earnings surprise history; it topped the Street’s EPS estimates in each of the trailing four quarters.

POWR Ratings Reflect Solid Prospects

ANF has an overall A rating, which equates to a Strong Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ANF has an A grade for Value and Quality. The company's lower-than-industry valuations are in sync with the Value grade. In addition, ANF's solid earnings and profitability are consistent with the Quality grade.

The stock is graded B for Growth, which is justified given the company's solid growth attributes.

Among 63 stocks in the A-rated Fashion & Luxury industry, ANF is ranked #8.

Beyond what is stated above, we have graded ANF for Stability, Sentiment, and Momentum. Get all ANF ratings here.

Bottom Line

ANF is a leading omnichannel retailer with an impressive brand portfolio and an international market presence. Considering its solid fundamentals and impressive growth outlook, we think it could be an excellent addition to one’s portfolio at the current price level.

How Does Abercrombie & Fitch Co. (ANF) Stack Up Against its Peers?

ANF has an overall grade of A in our proprietary rating system. This rating is superior to its peers in the Industrial - Paper industry, such as Lululemon Athletica Inc. (LULU), Citi Trends Inc. (CTRN), and Delta Apparels Inc. (DLA), which have a C (Neutral) rating.

ANF shares were trading at $36.60 per share on Tuesday morning, down $1.32 (-3.48%). Year-to-date, ANF has gained 79.76%, versus a 23.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.


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