Abercrombie & Fitch Co. (NYSE:ANF) investors have seen welcome relief this fall. The New Albany, Ohio-based upscale clothing retailer has enjoyed huge increases over the last few months. ANF stock traded in the low $9 per share range as late as August.
The last two earnings reports both sent the stock surging to almost $18 per share. Unfortunately for current stockholders, profits and the market itself remain erratic. Given the long-term trends and low, inconsistent profits, I would avoid this stock despite the recent surge.
Long-term owners of ANF stock have experienced six years of pain. In the fall of 2011, the market valued ANF stock in the $75 per share range. However, negative earnings news sent the value downward, and the stock traded below $50 per share by the end of 2011.
Since then every uptrend in the stock has been followed by a much bigger downtrend. This continued until the stock briefly fell below $9 in the summer of 2017. It’s now twice that value. Investors need to know whether the stock will return to the highs of several years ago, or if this is just another bounce.
Abercrombie & Fitch, Co. Has a Long History of Rebranding
The company currently operates in the fickle youth clothing industry. David T. Abercrombie and Ezra Fitch founded the company in 1892 as a sporting goods store. Having gone bankrupt in 1976, it was taken over by Oshman’s Sporting Goods Inc. and rebranded as a hunting wear retailer.
Oshman’s sold the store to The Limited Inc. (now known as L Brands Inc (NYSE:LB)) in 1986. They rebranded the company again as a clothing store for young adults and spun it off into its own company. Like in previous decades, ANF again faces an identity crisis.
Stores like Forever 21, TJX Companies Inc (NYSE:TJX), and Ross Stores, Inc. (NASDAQ:ROST) have drastically cut into ANF’s business. Further, Mike Jeffries, the previous CEO, alienated much of the public by pushing sexualized imagery and openly attacked “non-skinny” customers.
Jeffries stepped down in 2014. However, the damage has lingered. The company’s experienced a low point when the American Customer Service Index (ASCI) released by the University of Michigan named Abercrombie & Fitch, Co. the “most hated retail company” in 2016.
Also, the company has traditionally located most ANF stores in malls, which are now visited less often.
Fortunately for ANF stock stockholders, the company responded with an emphasis in online sales. The company has also backed away from Jeffries’ comments and has emphasized a more laid-back clothing style. The company announced on its most recent earnings call that the 18-34 demographic now has a better image of ANF.
ANF Stock Now Faces a High Valuation
The company Q3 2017 report showed improved sales and lower operating costs than the same quarter last year. However, its predicted valuation remains a problem for holders of ANF. For the current fiscal year, consensus earnings per share (EPS) stands at 11 cents per share.
That’s expected to rise to 21 cents per share in fiscal 2018. That places the current price-to-earnings (PE) ratio at over 160. The forward PE looks little better at 84. And with lower profits predicted for fiscal 2019, the company lacks the growth rate needed to justify a high PE.
Although the company has likely shed its “most hated retailer” image, ANF stock lacks the profitability and growth rates to justify its current price. The stock suffered for most of the decade under changing industry dynamics and an out-of-touch CEO.
The company has changed leadership and improved its image and online offerings. However, the current and forecasted EPS number are not high enough to justify the current stock price.
Given current conditions, investors should shop Abercrombie & Fitch, Co. for a youthful image and shop elsewhere for an investment opportunity.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
