Description

ANF is a clothing retailer focused on the 18-24 age bracket (under the “Abercrombie & Fitch” name) and the 7-17 age bracket (under the “abercrombie” name). After beating Wall Street estimates by at least 15% for six quarters in a row, ANF merely met estimates for its fiscal Q4 (ending 1/31/2000) and reported same store sales growth of only 3% (against expectations of 6% and prior year SSS growth of 26%). The shortfall was due in part because of poor inventory management (management didn’t anticipate extreme popularity of certain items) and a change in the way the company accounts for gift certificates (management chose to institute a more conservative policy that pushes revenue from gift certificates into later quarters).

ANF continues to be the premier premium retailer to the 18-24 segment. The company’s merchandising skills are among the best in the business. In fact, one Polo Ralph Lauren executive admits, “Ralph is obsessed with what Abercrombie is doing.”

ANF has the best margins (gross and net...even better than Gap) and the highest profitability (in terms of ROE) in the business. And based on current trends, even with ANF’s aggressive expansion (and therefore aggressive capital expenditure program), the company will be cash flow positive in 2000.

Despite the cautious near-term outlook on ANF and the retailing sector as a whole, even the most pessimistic analyst who covers ANF believes that it can achieve 5-year annualized EPS growth of 25%. If the company is successful in its expansion program, it can easily achieve 30%+ EPS over the next five years.

Already with two store concepts and a third on the way, the company is beginning to resemble 800-lb gorilla Gap more and more. And with only about 250 stores currently in place (compared to approximately 3,000 worldwide for Gap), ANF clearly has a lot of room to continue growing.

The latest outright insider purchase (i.e., not involving an option exercise) was on 2/18/2000 by director John Golden for 10,000 at $14.83. Additionally, the company will be buying back 6 million of its 102 million shares outstanding.

In its entire trading history (i.e., since being spun off from Limited), ANF 1) has never even approached such a discounted level and 2) has never had such an attractive future, relatively protected by a “franchise moat.” ANF currently trades at: 10.00x trailing earnings (7.72x this year’s estimate) compared to its historical range of 9x-56x; 1.42x trailing sales per share compared to its historical range of 1.2x-5.0x; 4.3x book value compared to its historical range of 4x-20x; and 8.7x cash flow compared to its historical range of 8.1x-36.7x.

Catalyst

1) Renewed focus on women’s line (which could add much growth, as it currently represents less than half of overall sales)
2) Additional focus on Web site (using it as a revenue generator, rather than just as a marketing tool)
3) Introduction of Concept 3 (in time for peak fall season), which is expected to yet again establish fashion trends