“Ugh” is all I can say when it comes to clothing retail stocks. Every company is just a bit different, so if a given stock and company is doing well will be a function of the demographic it serves. It is the fickleness of the consumer that drives clothing retailers. It makes or breaks them, which is why I avoid clothing retail stocks.
Abercrombie & Fitch Co. (NYSE:ANF) is one of the few clothing retail stocks that is holding its own in a very challenging environment. Its recent earnings report gave shareholders a certain degree of comfort, although some problems exist.
First, what exactly makes up ANF? There are four segments. The Abercrombie & Fitch brand is the most famous, with its higher-end, casual luxury apparel, focused toward consumers over the age of 20.
Abercrombie kids clothes are for kids aged 3 to 14 years, with tougher and rougher manufacturing while still being comfy — tough enough to stand up to everyday adventures, while never compromising comfort, softness or safety.
The company refers to the Hollister segment as “celebrating the liberating spirit of the endless summer inside everyone. Inspired by California’s laidback attitude, Hollister’s clothes are designed to be lived in and made your own, for wherever life takes you.” Finally there’s the women’s line, Gilly Hicks.
ANF revenues increased 4.8% to $859 million, leading to net income of $10 million. This translated to diluted EPS of $0.15 on a GAAP basis, up 20%.
This trend was better than what we’ve seen from ANF for the first nine months of the year, where revenues came in at $2.3 billion, flat from last year, leading to a net loss of $65 million. Diluted EPS was a loss of $0.98, almost 50% worse over the previous year.
So here we come to that scary number, the single most important number for any retail operation: comparable store sales. Comps tells us if more people went into stores and/or if a company has pricing power and/or if people are buying higher-ticket baskets.
The comps picture is, as a whole, the main concern. Abercrombie & Fitch Co. comps were up 4% for the quarter, which was a real bright spot, and flat for the year so far. When we break out the comps by brand, we see where the problem lies. It’s with the flagship brand.
Hollister is going gangbusters, with comp increases of 3%, 5% and now 8% in Q1, Q2 and Q3, respectively. These are good numbers, and the 8% is fantastic. But the flagship brand is still struggling a bit. Q1 saw a devastating comp decline of 10%. However, Q3 was only down 2%. This is far better than the 14% decline of Q3 last year.
So things are improving at ANF, and since Hollister accounts for almost 58% of revenue, that is very encouraging.
ANF has two things going for it that most retailers do not have. First, it has a sizable cash position of $459 million. Second, its long-term debt is relatively small at $264 million. That’s good, because 14% declining comps would not otherwise have been manageable. More good news: ANF projects comps to be up in the low-single digits for Q4.
Bottom Line on ANF Stock
However, ANF trades at roughly 60x this year’s run rate for earnings. Some people may think, however, that ANF stock has seen its bottom and may be a value or technical play. I think that may be true. The time to buy was early in the year when the stock was under $10.
There is resistance at $20.75, so there may be some speculative upside here. As an investment, I think you have to find something else. I do not see this as some fantastic turnaround, although speculative players may want to nibble.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
