Abercrombie & Fitch Company

ANF Details

Abercrombie & Fitch Company (NYSE: ANF) is a leading, global omnichannel specialty retailer of apparel and accessories. The company caters to men, women, and kids through five renowned brands. It holds around 735 stores spread across North America, Europe, Asia, and the Middle East. The company also operates through the e-commerce sites such as www.abercrombie.com, www.abercrombiekids.com, www.hollisterco.com, www.gillyhicks.com, and www.socialtourist.com.

Decent Performance in Q3FY21 (For the Quarter Ended 30 October 2021)

• The company reported a 10% YoY increase in its total net sales to $905 million in Q3FY21 with a rise in the digital net sales by 8% YoY to $413 million, resulting in 46% of overall sales in Q3FY21.
• Gross profit rate declined by 30 basis points to 63.7% compared to the pcp owing to the impact of 300 basis points of higher average unit cost from freight inflation and efforts to equipoise supply chain issues, offset by higher average unit retail on lower promotions.
• However, coupled with better cost management, the company achieved an 8% operating margin, marking its best third-quarter operating margin and income since 2012.
• Resultantly, the net income per diluted share increased to $0.77 and $0.86 on a reported and adjusted non-GAAP basis, respectively.

Exhibit 1: Performance Trend

Source: Analysis by Kalkine Group

Transforming Supply Chain and Delivery Capabilities

In a move to best meet its customers’ needs and shopping preferences, the company continues to transform its supply chain and deliver capabilities. Recently, ANF has introduced a same-day delivery service across its entire U.S. store fleet. To cater to this requirement, the company has joined hands with Uber, Shipt, Postmates, Roadie and software provider Delivery Solutions to deliver products from its stores to the end customers within the same day. The retailer’s transformation journey also includes opening a new highly automated distribution center in the Phoenix metropolitan area in collaboration with GXO Logistics in October. This facility will also enable the company to deliver products quickly and efficiently to its customers in the West Coast market.

Strong Financial and Liquidity Position

The company holds cash and equivalents of $0.9 billion as of 30 October 2021, and the overall liquidity (includes cash and equivalents and borrowing available under the ABL Facility) of around $1.1 billion. Besides, the company has repurchased ~2.7 million shares in Q3FY21, taking the total returns to shareholders during the year-to-date period ended 30 October 2021 through share repurchases to $235 million. Meanwhile, the company's board of directors has authorized a fresh share repurchase program of upto $500 million of outstanding common stock that replaced the earlier repurchase program of 10 million shares, which had a balance of around 3.9 million shares.

Aggressively Investing in Digitization

To transform into a digitally-led global omnichannel retailer, the company invests heavily in digital transformation. The company invested over $150 million in its digital and omnichannel capabilities from fiscal 2017 to 2020. Further, the company expects to invest over $50 million in fiscal 2021. Resultantly, ANF’s digital sales penetration constitutes 46% of overall sales in Q3FY21.

Key Metrics

The company’s gross margin improved from 59.4% in FY 2020 to 60.5% in FY 2021. Further, the current ratio improved to 1.73x in FY 2021 from 1.55x in FY 2020. Notably, the company’s cash conversion cycle has improved significantly to 58.1 days in FY 2021 from 60.3 days in FY 2020.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 55.85% of the total shareholding while the top four constitute the maximum holding. Notably, BlackRock Institutional Trust Company, N.A. and The Vanguard Group, Inc. are holding a maximum stake in the company at 15.00% and 12.32%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

The company is exposed to the adverse impact of COVID-19 that disrupts its business. Its business would be affected by the global economic and financial disruption, impacting consumer confidence and consumer spending. Fluctuations in foreign currency exchange rates could adversely impact its business. Further, it is susceptible to disorders or adverse conditions affecting its supply chain.

Outlook

The company remains focused on accelerating digital, data, and technology investments to boost agility and enhance customer experience. The retailer also emphasises augmenting its marketing investments to drive further momentum across brands and geographies. Moreover, it optimises store networks while remaining opportunistic in global store expansion. Notably, the company is witnessing a promising start to the holiday season. Meanwhile, the company is actively managing the continuing supply chain constraints. It remains confident that the product, marketing voice, and omnichannel experience fulfil the new and existing customers’ requirements throughout the fourth quarter.

Valuation Methodology: Price/EPS Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

ANF has delivered 9-month and one-year returns of ~+16.72% and ~+70.38%, respectively.

The stock has been valued using a Price/EPS multiple based relative valuation (on an illustrative basis) and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to peer average Price/EPS multiple (NTM basis) considering its focus towards optimizing the global store network and enhancing digital as well as omnichannel capabilities.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the closing market price of $37.62 per share, up by 4.21% on 7^th December 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices