Here’s how Abercrombie’s “Chase” strategy keeps printing money

Specialty retailer Abercrombie & Fitch Co. NYSE: ANF stock rose 285% in 2023 and continues to make new all-time highs trading up 17.6% in 2024. The turnaround in its business and shares has been nothing short of miraculous and celebrated by shareholders. While most consumer discretionary sector retailers rallied in the post-pandemic era, surging to highs in 2021, their stocks crumbled in 2022 as normalization set in against tough YoY comps.

Rising inventories squeeze margins.

Inventories swelled up while high inflation caused consumers to tighten their wallets, especially on apparel. Retailers like Under Armour Inc. NYSE: UAA, American Eagle Outfitters NYSE: AEO,  Ralph Lauren Co. NYSE: RL, and even retailers like Kohl’s Co. NYSE: KSS experienced margin contraction. This led to thinning margins as retailers had to bolster promotions to shrink inventories amidst waning demand in an uncertain economic climate.

Most retailer stocks have not recovered anywhere near their 2021 highs. However, Abercrombie surpassed its post-pandemic 2021 high of $48.97 in August 2023 and hasn’t looked back since more than doubling it.

The “Chase Strategy” keeps inventory levels down.

One of the keys to Abercrombie's success has been its "chase" strategy that bolsters its ability to manage inventory better. Chase Strategy is a real-time data-driven approach to inventory management utilizing data from the Internet-of-Things (IoT) to perform data analytics using artificial intelligence (AI) to derive business insights into trends.

It prioritizes responsiveness, enabling real-time adjustments as needed. They "chase" what's selling or chase what's in demand to lean into trends using real-time data to adjust production and inventory allocations according to demand.

This is the opposite of the conventional “level” strategy that attempts to predict demand relying on preseason forecasting based on historical data, keeping production levels fixed regardless of demand.

Chase strategy should not be mistaken for “fast fashion” which also utilizes real-time data. Chase strategy doesn’t use the predicting and forecasting elements nor the cheap quality and cheaper prices.

Leveraging data

Production cycles are shorter, which enables Abercrombie to react to emerging trends while avoiding overproducing and overstocking unpopular items. Real-time sales and customer insight data analytics help identify which products are appealing to target audiences and spot micro trends. These insights enable them to make informed choices on what to chase and what to drop. A chase strategy may appear impulsive from the outside, but it requires flawless execution augmented by technology, which includes IoT and AI, to enable data-driven and agile decision-making. 

The proof is in the pudding.

Abercrombie reported Q3 2023 EPS of $1.83, crushing analyst estimates by 65 cents. Revenues surged 20% YoY to $1.06 billion, crushing analyst estimates for $981 million. Comps were up 16% YoY, comprised of 26% for Abercrombie and 7% for Hollister. Abercrombie reported that inventory levels were down 20% YoY! This positioned them well heading into the holiday season, enabling them to benefit from higher pricing, which means higher margins and higher profits.

Firing on all pistons!

On Jan. 8, 2024, Abercrombie raised their Q4 2023 forecasts based on strong than expected holiday sales. They raised Q4 net sales to the high teens, up from previous guidance of low double-digit. They raised operating margins to 15%, up from previous guidance of 12% to 14%. They raised full-year 2023 net sales growth to 14% to 15%, up from 12% to 14% previous guidance. They raised the full-year 2023 operating margin to 11%, up from the previous guidance of 10%. They will be reporting their Q4 2023 earnings in March 2024. Get AI-powered insights on MarketBeat.

Telsey Advisory Group raises price target to $105.

On Jan. 9, 2024, Telsey Advisory Group reiterated its outperform rating on ANF shares and raised its price target to $105 from $95, citing a better-than-expected holiday period. They noted this was the fourth time ANF raised its annual outlook in as many quarters. Analysts expect continued margin expansion through digital growth and square footage productivity. The $105 price target implies a 16.2X multiple on its two-year forward EPS estimate of $6.48, compared to a one-year average multiple of 15.3X and a historical NTM average multiple of 17.6X.

Abercrombie & Fitch analyst ratings and price targets are at MarketBeat. Abercrombie & Fitch peers and competitor stocks can be found with the MarketBeat stock screener. ANF has a 13.4% short interest.

 

Daily bull flag breakout pattern

The daily candlestick chart on ANF illustrates the daily bull flag breakout pattern. The flagpole formed on its rally from $65.60 on its Q3 2023 earnings report on Nov. 21, 2023. Shares surged to peak at $94.08 on Dec. 26, 2023. The pullback comprised of lower highs and lower lows formed the bull flag as ANF fell to a low of $86.91 before triggering the daily market structure low (MSL) breakout through the $90.97 trigger, staging the next leg up to a high of $105.81 on Jan. 23, 2024. The daily relative strength index (RSI) chopped and hovered below the overbought 70-band despite the 25-point run-up. The daily market structure high (MSH) sell trigger form at $101.76. The daily 50-period moving average (MA) support is rising to $86.69. Pullback support levels are at $90.97, $82.60, $79.20 and $71.14.