Abercrombie & Fitch: Out Of The Ditch

| About: Abercrombie & (ANF)
This article is now exclusive for PRO subscribers.


Mixed Q4 earnings signal short-term losses but potential for long-term success.

Hollister brand holds the key to a turnaround in fortunes.

Abercrombie finally instates replacement CEO two-years after Michael Jeffries stepped down.

The stock price of Abercrombie & Fitch (NYSE:ANF) ended the week with an 8% drop in price on Friday. This negative trend stemmed from the release of its Q4 earnings report last Thursday but the drop now leaves the stock undervalued and in prime position for a turnaround. I will explain why I see strong potential returns in going long ANF at its current price.

Abercrombie have been without a CEO since 2014 when Michael Jeffries stepped down and the day-to-day runnings since 2015, when the search for a new head was put on hold, have been coordinated by a team led by Executive Chairman Arthur Martinez. However, in February of this year a new CEO was finally put in place as Fran Horowitz (previously working under the Hollister brand) received the promotion. In an interview, she discusses obstacles going forward but mainly, optimistically, talks about the focus on a much-needed turnaround in sales and revenue for the Abercrombie sector of the brand. She references the need to gain momentum and talks up her vision on how to rise the Abercrombie name from the ashes.

Abercrombie stores have been closing in malls around the US and with many leases up for renewal next year has led to the company being able to cut back on deadweight, low profit stores and focus on trimming down their high street presence. The aim in doing this is to focus on online shopping and in particular to develop their app due to increased mobile sales. Abercrombie are redesigning their image in an attempt to keep up with the crowd and follow in the success of the Hollister arm of their brand which is outperforming expectations. 2017 sees a chance to increase on the sales and adaptability of both departments.

In terms of the Q4 financials that have caused the recent dip in the ANF stock, it actually wasn't all doom and gloom. A lot of positives were coming out of the ANF camp around the time of release which actually saw a jump in its price before negative sales results brought in a slight reality check. However, with the stock price now sitting at around 12 USD, I believe that we look at a seriously undervalued stock with large room to grow. The main talking point being its low price-to-book ratio of 0.74, almost a third of its peer median, meaning that, effectively, it should naturally be valued higher than it currently is. I believe we are likely to see a rebound from the current earnings dip as more word comes out from the new CEO about plans going forward.

Amidst the confused earnings of the Abercrombie & Fitch brand, another factor of the group shone through; Hollister. The Hollister branch saw an increase in sales and looks to be the key to success in Abercrombie's near future - which explains why they can't stop talking about it.

To conclude, I see the ANF stock as having large room to grow following its recent hit in price and with promising signs coming out of the boardroom and from the Hollister brand in particular, there is reason to back a potential climb in the stocks price beyond the mere undervaluation of it at its current level.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.