Abercrombie & Fitch (ANF) is an apparel and lifestyle brand operating mainly in the United States, with expanding branches and stores in both Europe and China. Abercrombie is one of the leading specialty retailers of premium casual apparel in the U.S. The company has a strong portfolio of well-established brands.
The fact that ANF has recently hired Goldman Sachs as an advisor, following pressure from activist investor Relational Capital, is positive for the shares after several years of disappointing results. If ANF were to be bought out in a LBO at the mean Enterprise Value/LTM EBITDA multiple of the last four relevant transaction in the space, which was 0.975x, it would imply a share price of $53.
I am positive of ANF recent product launches. The company has been manufacturing yoga apparel and shifting its focus from tops to more denim products. These changes could help the company gain shares from competitors like the American Eagle (AEO), Ralph Lauren (RL) or The Gap (GPS). Working under brand names of Hollister, Gilly Hicks, Abercrombie Kids, and Abercrombie and Fitch, A&F already has 1,045 stores operating in North America, Asia, and Europe.
I find very interesting the international expansion strategy that ANF is pursuing. In Europe, the company's key area of international expansion still moves forward as ANF reported a solid revenue growth of 85%. Hollister brand continues to report strong sales as it covers two-thirds of the company's business in the continent. The company is also expanding in Aisa. A&F is building its third mall-based store in China, as Chinese customers learn to familiarize themselves with the products of the company. Abercrombie plans to open five Abercrombie & Fitch stores in flagship locations including Hamburg, Hong Kong, Munich, Dublin and Amsterdam as well as an Abercrombie kids store in London. In addition, the company plans to open about 40 international Hollister stores in fiscal 2012.
Abercrombie does not simply go head to head against its closest competitor, the American Eagle. Its completely separate chain, Hollister, offers products that are of the same level of pricing with AEO. This makes the competition more like AEO vs. Hollister rather than AEO vs. A&F. Abercrombie generates internal allies, referring to its four separate chains, to prevent cost-cutting just to catch up with competitors, and more importantly, to boost its revenues and net income. In the face of economic challenges, where teenagers have become less active shoppers, Abercrombie has restructured its business and I expect that investors will appreciate those results in the coming quarters. The company has closed its underperforming U.S. chain stores and speeding up growth at its Abercrombie Kids and Hollister store concepts.
In terms of valuation, ANF trades at just a 0.6x P/S multiple and 1.41x P/BV in comparison to peers Urban Outfitters (URBN) 4.89x P/S and 2.10x P/BV and Guess (GES) 1.85x P/BV and 0.77x P/S. This is a clear indication that ANF shares are cheap and the market has below-average expectations of future outperformance. The stock is also creating a technical bottom in the range of $30/$35. I would consider a very negative signal if ANF shares break the level of $30 and go lower with above than average volume. As detailed in the blog Warren Trades, I think it is essential to combine fundamentals and technicals for a better investment process.
Finally, it is essential to highlight that ANF has a very healthy and nearly debt-free balance sheet with cash and cash equivalents of $321.6 million and long-term debt of only $65.7 million at the end of the first quarter of fiscal 2012. This brings flexibility to drive future growth.
In conclusion, I think that ANF shares are cheap and I will buy them as soon as my technical analysis points to evidence that institutional buyers are silently accumulating shares at the current price levels. I will never buy any stock based on fundamentals only so my plan with ANF is waiting for a price consolidation and buy as soon as there is strong buying volume and shares start overperforming the general market.