Update: Abercrombie & Fitch Q3 Earnings And The Building Value Trap

| About: Abercrombie & (ANF)
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ANF managed to beat earnings consensus.

We were bearish on the transition away from the logo apparel model.

We still remain cautious on the business despite the valuation.

Abercrombie & Fitch (NYSE:ANF) posted 3Q earnings of $0.42 a share, topping $0.41 expectations, and revenues of $911 million marginally missed expectations. Its $0.42 earnings per share was down from $0.52 for the same quarter last year. Comparable store sales were down 8% y/y.

We covered ANF a few months ago and at the time we noted that ANF was exiting the logo business. But we stated,

The big issue with Abercrombie is that it's not necessarily targeting a different customer, thus taking a big risk given the number of brands fighting for teen retail dollars.

Shares are now down 33% over the last three months.

Trading at 4.4x forward EV/EBITDA, it looks a bit intriguing. American Eagle (NYSE:AEO), Buckle (NYSE:BKE), Express (NYSE:EXPR) and the like trade at 5.5x and above. In reality, a 3.5x to 5.5x forward EV/EBITDA multiple is typical for ANF over the last couple years. What's more is that there are issues there in the apparel space. It's becoming clear that these are industry-wide issues that don't have an easy fix. Debt isn't a huge issue, but it's there at $350 million.

The company has noted that it remains a very challenging environment, with that pressure expected to continue through 4Q. Guidance for fiscal 4Q EPS was dropped to $1.10 to $1.23, versus previous consensus of $1.33. One of the things ANF thinks can pull it out of its funk is expanding international reach. But recall the 8% fall in comps - that was driven by a 15% fall in international comps. Mall traffic will remain weak and of that teen traffic, they'll continue to stick to the likes of Zara, H&M and Forever 21. We're still negative on ANF.

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