Abercrombie & Fitch Co. (NYSE:ANF) beat estimates. As fears of Amazon.com, Inc. (NASDAQ: AMZN) taking over retail have subsided, the U.S. retail sector also enjoyed both heavy mall traffic and record sales during the 2017 holiday season.
As a result, ANF stock and other brick-and-mortar retailers have experienced a comeback. The stock up spiked following the earnings announcement. It also has risen by more than 160% since last July.
Unfortunately for new investors, this increase means they’ve likely missed the boat on Abercrombie stock.
ANF Stock Beat Both Quarterly and Yearly estimates
ANF blew away Wall Street estimates. For 4Q 2017, ANF earnings came in at $1.38 per share. Analysts had been expecting $1.10 per share. The company earned $1.19 billion in revenue, a 14.4% increase over the 4Q 2016 figure. The company also beat revenue estimates by $30 million.
For the full year, ANF earnings were 65 cents per share. Analysts had expected only 39 cents. This number is also an improvement over the 6-cent loss seen in 2016. Revenue for the fiscal year ending January 2018 came in at $3.493 billion, a 5% increase over the previous year.
To be sure, for 2017, the retail industry enjoyed one of the best holiday seasons it had seen in years. Peers such as Gap Inc (NYSE:GPS) and Urban Outfitters, Inc. (NASDAQ:URBN) also beat estimates. Although American Eagle Outfitters (NYSE:AEO) has not reported yet, analysts expect a year-over-year increase in earnings of 12.8%.
Where ANF Stock Goes From Here
Still, with the economy and market trending upward, one has to wonder if the economy is now in the latter phases of an economic growth cycle. The retail sector could see a stronger 2018 and 2019 holiday season. The probability of stronger seasons coming goes down by the year, however.
Plus, Abercrombie stock has enjoyed a considerable move higher over the last eight months. The stock traded below $9 per share as late as July. With its post-earnings price spike, the stock has risen to over $24 per share. This is despite consensus estimates for fiscal 2019 of 49 cents per share, taking the price-earnings (P/E) ratio above 50.
Although analysts expect only 31 cents per share in profit for fiscal 2020, others take a are more optimistic view. Our own Luke Lango forecasts ANF stock will see profits of $1.80 per share three years from now. He projects a two-year price target of $29 per share. With the stock trading a little over $24 per share, that represents an increase of under 20%.
Lango forecasts that ANF will accomplish this with 1%-2% increases in sales, cost-cutting measures and a long-term P/E ratio of 16. Investors should also remember that the 90-year average growth rate of the S&P 500 stands at about 9.8%. If my colleague is right, ANF stock will barely beat the S&P 500, if at all.
To be fair, Lango said he liked it under $24 per share, which now stands close to current price levels. Still, retail clothing remains a fickle market, particularly in the youth segment. Youth clothing stores fall in and out of favor like changes in the wind.
Considering that reality, I might prefer to track the S&P with the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) where the winds of change will likely remain more favorable.
Final Thoughts on ANF Stock
ANF stock has recovered from last year’s gloomy retail outlook. Unfortunately for new buyers, it appears too “recovered” to profitably invest new money. ANF’s profits came in far ahead of estimates. This led to a large spike in the stock price in morning trading. Unfortunately, that price has risen to a P/E ratio of about 50 times forward earnings. The average P/E in this sector remains closer to 16.
Also, one factor that investors often miss is the fickle nature of youth clothing retail. Trends and tastes among the youth population change with the wind. Interpreting the changes wrongly could prove costly to holders of ANF stock.
Considering the rise in the stock price, investors will likely achieve higher returns in the S&P even under the most optimistic projections.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.