While most shoppers won't consider purchasing Abercrombie's (NYSE:ANF) clothes unless there is a significant discount, shareholders should do the same.
Pump and dump
Abercrombie & Fitch's stock was one of the high-beta darlings over the last 2 years, tripling from $25 to highs of $77 a share. In similar fashion with other high-beta peers (including Netflix and First Solar) the stock was ripe for a major correction.
In just three weeks the stock has lost nearly 40% of its market value with shares dropping from $77 to $47 in today's trading.
While international growth has been the main driver behind the long term rally, Abercrombie unexpectedly announced a decline in European sales in the beginning of November prompting shares to fall 22% on a single day.
Today's disappointing earnings (57cts a share vs. 72ct on already lowered analyst expectations) caused another 13% drop.
While such a major correction in a short period of time always triggers discussion about a potential rebound, I am not a big fan of the stock.
With net profits flat in the 3rd quarter yoy, A&F is about to make $125mn this year. Higher cotton costs, lower gross margin and disappointing international results are worrying. Alarm bells are ringing as well when inventories increased 33% to over $680mn.
Despite the 40% drop stocks still trade at 20-25 times earnings, with no clear EPS growth. Over the last 3 years, cumulative profits came in at about $300mn, yielding a mere 5% return on equity over that period. While management has committed to a value creating strategy, it clearly failed to do so in the past and with retail headwinds becoming more apparent, I am getting worried.
At 20-25x earnings, 2.5x book value and a mere 1.5% dividend yield, there are more attractive alternatives for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.