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Abercrombie & Fitch's Q4 Doesn't Justify The Valuation


  • Abercrombie & Fitch reported strong earnings on Wednesday.
  • But guidance for this year is weak, as comps and margins should be up only slightly.
  • That makes the exorbitant valuation even more pronounced, and I still think there's a lot of downside risk here.

(Image credit)

I’ll admit that when it comes to Abercrombie & Fitch (NYSE:ANF), I’ve missed the boat. The stock was tremendously cheap back in the summer of 2017, but a rally that has seen its value roughly triple since that point has put me firmly in the bearish camp. But despite the enormous revaluation of the stock much higher, it just keeps climbing in what has been a stunning rally. After Q4 results were posted on Wednesday, the stock moved 12% higher once again, making new relative highs in what has become a pattern. The problem is that even though ANF’s results have certainly improved, the stock is so far out in front of the turnaround that I simply cannot find a scenario where today’s price is justified.

Comps impress

Total sales were up 15% in Q4, and that sounds very nice, but a lot of the gain was due to non-operational factors. Comps were up 9% during the quarter to beat estimates as Hollister continued its impressive run, leading the way at 11%. Importantly, the Abercrombie brand actually posted positive comps for the only time in 2017, coming in at 5%. That’s a huge achievement for ANF, and I suspect this is a big reason why investors took so well to the report. Unfortunately, the remainder of the 15% sales gain outside of comps was due to forex translation and an extra week during the quarter. These items added the balance of ANF’s sales growth in Q4, and while they still count, they aren’t repeatable, and thus, I’m more focused on comps than the total sales gain. Regardless, the company’s sales result from Q4 was tremendous, and there’s no way to spin it in some other light.

Expense leverage shines in Q4

ANF managed to boost its margins as

This article was written by

Josh Arnold profile picture

I've been covering financial markets for ten years, using a combination of technical and fundamental analysis to identify potential winners (and losers) early, particularly when it comes to growth stocks.

Analyst’s Disclosure: I am/we are short ANF. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (10)

stuck profile picture
We are bearish because we review the financials and ignore the press releases put out by the hedge funds and institutions that own and manipulate the stock float with 99.4% ownership of that float. No one wanted to buy this loser when it as 9.00 and trying to sell itself. But now because of two quarters created by pro forma accounting and the elimination of millions in expenses from the income statement they create a small profit. They had to make adjustments of 55 cents a share. And how can they justify not counting business expenses when they add directly to the bottom line some made up number for tax breaks and job act adjustments? Why is that an ordinary business expense when it is a one time made up number? Yet legal fees are not ordinary for a company that offends customers and rips off employees and store managers?
Its quite fascinating to still see these bearish articles. You guys have been banging the bk drums for over 2 years now. There is clearly a legitimate turnaround in progress. And you are still bearish.
Thanks for the article. I have heard that the high percentage of institutional ownership is behind the rally and propping it up. Any validity to that theory?
Josh Arnold profile picture
Could be, but hard to verify. The moves this thing is making certainly aren't from mom and pop. Thanks very much for reading!
This could still double
It trades at a massive discount to other players on EV/sales showing the upside which can come as earnings recover on the back of strong operating leverage
Josh Arnold profile picture
Fair enough, but it still looks tremendously expensive to me. Thanks very much for reading.
Totally disagree with you with respect to valu and fundamentals here, Josh
Strong balance sheet with high single digits growth.
ANF would have done better if not for short term one time tax cost offset by future tax benefits , so earnings could have been better and will be moving forward. Management has retooled production chain cycle, Omni-channel and international sales across all brands, and began to improve clothing - more one-time costs likely to payoff bigly.
ANF repositioned for long-term growth on lower costs with higher velocity of sales and likely to beat easy guidance.
We could see $2 EPS in '18.
The strong balance sheet, cash position, fcf, and dividend make this a short trap to those looking to short anything retail. There are some great short opportunities in retail, but ANF is not one of them.
Sophocles Sophocleous profile picture
EV/EBITDA is not high either. In my opinion you are focusing too much on P/E. I think there are better shorts out there.
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