Abercrombie & Fitch (ANF) is an obvious winner with all-star analysts coming out to cheer the once-stagnant teen clothier even though the year-over-year sales trend is still negative.
How can investors reconcile a 6% decline in store activity — in the all-important holiday season, no less – with a 12% rally in ANF shares?
The story here is less about the here and now than it is about how this company was doing a year ago and where management may take us in the next few quarters.
ANF started to look vulnerable last spring as teenagers boycotted the malls and Wall Street had to keep pushing missed sales forecasts farther back on the calendar.
As the summer and then the key back-to-school seasons fizzled, it became clear that even a blockbuster holiday wasn’t going to be enough to keep ANF ahead of full-year earnings targets and the stock plunged from a 52-week high to nearly a 52-week low in barely three months.
The bullish signal here is that now that apparently unbeatable 2012 comparisons have rolled off the ANF chart, management has an easier job ahead when it comes to meeting dramatically reduced expectations. Evidently all this company now has to do is match last year’s disappointments and investors will cheer to see that while retail may not exactly be booming, the pain is manageable.
Six months ago, Wall Street was openly wondering whether the consumer was exhausted and a 2008-style retail crash was on the way. Now we know that while the tone is far from stellar, we are at least equally as distant from an apocalypse. The end of the retail world never did arrive, but the stocks like ANF and American Outfitters (AEO) are still priced for that prospect.
And if reduced expectations and easier comps become the keynote of 2014, these stocks have a long way to rebound. Even after today’s rally, ANF could soar another 50% before it returns to the now-lofty $55 we saw before sales started to sour late last spring, and many other specialty apparel chains have similar upside profiles.
More importantly, there is actual operational upside now that management has realized that the strategies and fashion lines that kept them afloat for the past three or four years have hit a wall.
ANF won a lot of kudos today for raising its full-year earnings guidance for the first time in ages, implying that its recent efforts to slim down operational costs and revamp its clothing mix have already started to reverse the previously bearish trend.
Teenagers are evidently shopping again. If ANF now thinks it can squeeze 15 cents per share more out of its stores in the current fiscal year, the holiday quarter was apparently 10% to 20% better than the market was steeled to expect.
In pure dollar terms, the holiday may still look disappointing compared to 2012, but at this point the baseline is set so low that any growth whatsoever will be viewed as miraculous and any declines across the retail sector as a whole will be transitory.
ANF and its rivals may have finally signaled the “new normal” somewhere between boom and bust. If so, we could see share prices build from here.
One indicator that the new status quo in retail will be different but more sustainable than the old: the fourth quarter is fading from prominence as the do-or-die season when desperate chains cram a year of sales into the period between Thanksgiving and the New Year.
We saw the front half of the year become more of a factor in 2013 sales trends as the focus shifted away from all-or-nothing holiday and back-to-school sales. Part of this is the rise of online retail pushing seasonal merchandise forward as households shop earlier in the year or stockpile staples for later consumption – back to school, for example, now starts in July instead of late August, and even the holiday sales are encroaching on Halloween.
NF is working to smooth its seasonality by bringing in more cold-weather clothes to boost the traditionally dull winter and spring quarters. We will know whether the strategy is working in a few months, but for now the stock is definitely reaping the rewards.