Abercrombie & Fitch Hits 12-Year High...Is It Still Undervalued?

The last time Abercrombie & Fitch Co. NYSE: ANF traded this high, Usain Bolt was the male World Athlete of the Year. 

Shares of the lifestyle clothes retailer have sprinted to their highest level since November 2011. Not to be mistaken for main competitor Gap, they have ‘gapped up’ twice in heavy volume over the last five months en route to a stunning 155% year-to-date run.

As the apparel industry continues to struggle with a weakened discretionary spending environment, Abercrombie & Fitch continues to excel. While the company hasn’t been immune to the effects of inflation and rising interest rates, it is discovering a new playbook to outpace peers. With its core lower-income, teen audience feeling the effects of macro pressures more than others, A&F is turning to other demographics to spur sales. 

A key part of this revamped strategy is activewear. A&F’s expanding lineup of men’s and women’s workout gear is helping it connect with fitness enthusiasts of all ages. The selections are also hitting home with non-athletes and remote workers that continue to embrace casual attire in the post-pandemic world.

Last month, A&F teamed up with the National Football League (NFL) to launch crewneck sweatshirts and t-shirts representing all 32 NFL teams. Like the new stock price, the official licensed NFL Collection merchandise isn’t cheap. An NFL graphic tee sells for $50 and the sweatshirt goes for $90 online. But if A&F’s recent successes (and the price inelasticity of NFL fanatics) are any indication, the merchandise will sell.

In an effort to diversify away from its core Abercrombie, Abercrombie Kids and Hollister brands, A&F has also rolled out new apparel for the office and special occasions. The financial results are proving to be stylish.

Does Abercrombie & Fitch Stock Have Good Fundamentals?

A&F has returned to top-line growth this year and done so in resounding ‘fashion.’ Second quarter revenue jumped 16% year-over-year. After breaking even in the prior year period, the adjusted operating margin swelled to 10%, helping the company crush Wall Street’s earnings expectations. Double digit revenue growth and a return to profitability are bullish developments heading into the holiday shopping season and new fiscal year.  

The income statement is clearly strengthening — however, A&F’s balance sheet is in need of a makeover. As of the end of the second quarter, it contained $617 million in cash compared to $370 million at the end of 2022. This positive is offset though by the fact that long-term debt and lease liabilities remained at $1.2 billion. Leverage will need to be reduced to improve the company’s overall fundamental quality — and give it the flexibility to reinstate a dividend that was suspended in 2020.

One metric that has been reduced is inventory. Thanks to supply chain improvements, inventories were down 30% in Q2. This bodes well for profit margins because there is now less of a need for aggressive markdowns and promotions to move products. It also puts A&F in a better position to restock top sellers, which will be critical for optimizing holiday sales. 

Is ANF Stock Overvalued or Undervalued?

A&F management raised its full-year guidance for the second time on the strength of its core brands, expanded offerings and declining logistics costs. In turn, analysts have been raising their earnings per share (EPS) estimates for the current and next fiscal years. 

The consensus forecast for this year has moved up to $4.38. This gives ANF a P/E ratio of 13x, which is at the low end of the stock’s 9x to 32x five-year range. Even after this year’s amazing rally and current five-month winning streak, A&F looks undervalued relative to its own history.

How does the valuation compare to those of industry peers?

ANF is still one of the least expensive mid-cap apparel retailers. Burlington Stores (24x), Gap (16x) and Boot Barn (16x) are pricier. American Eagle Outfitters has roughly the same valuation as ANF, while Urban Outfitters (10x) is on the clearance rack.

Despite the low valuation, Wall Street continues to play catch up on this red-hot stock. The consensus $55 price target is below the current share price, and only two targets are above $60. If A&F can continue to execute its strategy, multiple expansion towards 20x (i.e., another 50% upside) isn’t out of the question.