While 2016 has so far turned into a year of disappointment for many, it has also been a time of unexpected redemption. Case in point is Abercrombie & Fitch Co. (ANF). Over the trailing five years, ANF stock has lost 48% of its value in the financial markets, a casualty of a generally poor retail environment and a labor market that has only recently found some balance.
To be fair, Abercrombie stock was just as stymied by controversial business practices, of which they have a long and sordid history. But with a surprising earnings performance, ANF looks ahead to a new chapter.
For the fourth quarter of fiscal year 2016, ANF stock posted an earnings per share, excluding items, of $1.08, handily beating consensus estimates of 99 cents. However, the bigger news was the context of those earnings.
For existing stores that were open for at least one year, retail experts were anticipating a slight dip in sales. Instead, ANF pulled a reversal, with same-store revenue increasing 1% in Q4. As a result, it ended a three-year losing streak in that metric.
Good News for Abercrombie & Fitch
Much of the turnaround can be attributed to ANF’s Hollister stores, where strong demand pushed same-store sales to a 4% increase, almost doubling analysts’ expectations.
A tremendous amount of effort was exerted into reshaping the look, feel and overall brand message for Hollister. This notably included reducing the amount of logo-heavy attire that consumers increasingly viewed as tacky. But it also meant that the annoying music, dimly lit ambiance and unintuitive product placement had to go.
Enter the new Hollister, which is aligned with current fashion trends and is decidedly more family friendly.
If sentiment in the markets is anything to go by, investors of Abercrombie stock are definitely thankful, if not outright impressed. In the premarket trading session, ANF stock skyrocketed to an early lead. The gains have since been erased as the broad markets have failed to follow through on their strong move yesterday. Still, Wall Street is on notice. Abercrombie stock is up nearly 10% year-to-date, while the benchmark Dow Jones Industrial Average is off 3.3%, even with its recent huffing and puffing.
This tells us a couple of things. First, ANF stock buyers are willing to buy the sizzle rather than the steak. This is significant, because the fundamentals are fairly shoddy. On paper, Abercrombie stock is challenged by poor profit margins relative to other apparel retailers, notably Gap In. (GPS) and American Eagle Outfitters (AEO). This contributes to a comparatively rich valuation against earnings — even on a forward looking basis.
Second, ANF stock’s dramatic reversal of fortune suggests that the worse is behind the retailer — both as a capital investment and as an ongoing business. Over the past 52 weeks, Abercrombie stock witnessed a 24% boost in the markets. Much of the bullishness has come in the last six months, where shares have jumped 46%. This confirms fundamental sentiment in that while net income overall for ANF has been declining, the rate of loss has slowed significantly.
What’s Next for ANF Stock?
The necessary steps taken by upper management set up an intriguing trading opportunity. Currently, there’s an imbalance between recent momentum for ANF stock and the percentage of its float held short. In the tail end of 2011, the short interest for Abercrombie stock was at 7%. In 2015, it averaged nearly 39%. As of mid-February of this year, the short interest is still very much elevated at 34%.
It will be hard for the bears to stomach this position, especially if ANF manages to trudge along. Even if the company simply pulls shoppers away from GPS or AEO and breaks no new ground, Wall Street may still view this as a substantive victory. That may drive more buyers into Abercrombie stock, which may cause weaker-kneed bears to cover their position.
And with a 34% short interest, that’s a mighty big pool in which short traders have to buy back borrowed shares.
Will ANF stock be the turnaround story of 2016? It’s difficult to say since the retail environment is still quite challenged. But what is also difficult is to ignore the efforts undertaken by the ANF leadership. The rebranding campaign has paid surprising dividends in terms of top-line sales and enthusiasm in the capital markets.
Being the underdog in this case could be a huge bonus, as the weight of expectations is not nearly as pronounced as for other companies, making Abercrombie stock a speculative opportunity worth investigating.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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