The retail sector has been struggling in recent months as e-commerce continues to pick up speed. Shopping malls have taken a hit and several stores have been forced to close their doors due to less foot traffic. Teen clothing retailer Abercrombie & Fitch Co. (ANF) has not been exempt from this fallout, and the firm’s first-quarter results showcased that fact.
However, if ANF is able to pull off a turnaround, now could be a good chance to get in with a long position.
Buying a turnaround story is saddled with a lot of risk and ANF is no exception … especially when you take into account the company’s Q1 results, which showed that same-store sales for its flagship brand declined a whopping 8%.
Not only that, but the firm’s net profit margin is just 1.10%, a sign that things could go very wrong in a hurry. These figures are likely the reason that ANF stock declined 20% over the last week, but with that abandonment there is an opportunity.
But not everything is doom and gloom for Abercrombie & Fitch.
ANF’s price-to-book value is 1.06, which is not a bad ratio, as it suggests that you can buy the company right now for the price of its assets. The company’s debt-to-equity ratio is about average for the industry and the stock has a 4% dividend yield, making the wait for an improvement much more enticing.
However, current fundamentals aren’t the main reason to buy ANF stock — its turnaround story is.
Turnaround Story for ANF Stock?
While the company’s first-quarter results weren’t pretty, management has said it is confident that things will improve in the second half of the year. The company’s efforts to build its Hollister brand appear to be paying off. Its 24 newly remodeled Hollister stores saw traffic and sales increase and 50 more are expected to receive a makeover in the coming quarter.
Hollister is also being helped by a series of bankruptcies and restructuring plans among competitors like Pacific Sunwear of California, Inc. (PSUNQ), Quicksilver and Wet Seal. With many of its direct competitors closing their doors at the same time that Hollister is enhancing its products and remodeling its locations, the brand is likely to pick up speed.
The Bottom Line for Abercrombie & Fitch
Abercrombie & Fitch’s dismal first quarter has put many investors off, but some degree of up and down is to be expected in the retail sector, especially considering the current climate.
Teen unemployment is up, so brands that cater to that sector are likely to suffer. ANF has outlasted many of its competitors, and its solid turnaround efforts have been masked by poor first-quarter results. The firm’s focus on simplifying the shopping experience and fewer logo-based clothing items has resonated with shoppers and helped further the brand’s popularity among teens.
Buying Abercrombie isn’t without uncertainty, and the stock is likely to see a few more peaks and troughs in the coming year as its turnaround takes shape.
However, as teen retail stocks go, ANF stock is a good play for investors with a stomach for risk, as the reward is likely to be sizable once the firm regains its footing.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
