Teen retailer Abercrombie & Fitch Co. (NYSE:ANF) has had a tough run over the past five years, as the brand fell out of favor with mainstream consumers and e-commerce and fast-fashion took over the space. However, after dropping below $10 per share in 2017, Abercrombie & Fitch stock has been making a solid comeback, climbing to nearly $30 per share in March.
Those gains weren’t unfounded either, the company finally turned in a solid performance during the final quarter of 2017 and guidance for 2018 was strong. Most notably, net sales saw a 15% increase from the year-ago quarter and comps rose an impressive 9%. Hollister was responsible for the majority of that increase with its sales rising 19%, while the firm’s namesake brand saw sales increase by a respectable 9%. Comps showed a similar trend with Hollister’s up 11% year over year and ANF posting a 5% rise in same-store sales.
The Turnaround Story
Those figures are certainly strong, especially considering Abercrombie & Fitch’s rocky past. Another big reason investors have felt more comfortable taking a position in ANF stock recently has been the firm’s clear turnaround objectives — something that was lacking just a year ago.
Abercrombie has been closing down unprofitable locations and opening new stores both abroad and in strategic locations at home. That strategy is set to continue this year with the firm planning 11 new stores internationally and 10 within the US, while at the same time closing down 60 US-based stores.
ANF is also focusing on growing the Hollister brand in the US, where it has resonated with consumers and withstood competition from other fast-fashion brands leading it to overtake the company’s flagship brand. The firm’s Abercrombie & Fitch brand has seen success abroad, so management is working to grow its presence in China by opening a store on Alibaba Group Holding Ltd’s (NYSE:BABA) Tmall.
Why Not Buy?
It’s not that I don’t think Abercrombie & Fitch stock has made an impressive comeback — and I certainly think that management’s efforts to revive what appeared to be a dying brand should be commended — however, ANF isn’t a buy at its current share price because its potential is already priced in and the risks are simply too great.
For one, ANF isn’t exactly a cheap buy. The company has a price-to-earnings ratio of 75.98 — a far cry from the industry average of 22.31 and the S&P 500’s 15.43. Peers like American Eagle Outfitters (NYSE:AEO) are far cheaper and look financially stronger to withstand bumps in the road. While ANF has a sizable debt load of $249.69, AEO has no debt at all. Sure, ANF pays a 3.13% dividend yield, but its payout ratio is more than 200%.
Simply put, I think the progress that ANF has made has been more than priced into the company’s stock and, financially, Abercrombie & Fitch stock is still on shaky footing.
Another reason Abercrombie & Fitch stock wouldn’t be my top retail pick is the fact that the company is facing several headwinds that could potentially hurt its future performance. Like any other fashion brand, the company is susceptible to changing consumer preferences, economic issues that drag down consumer spending and rising competition. So, when choosing a company in this space, you want to find one that looks like it can weather a storm. Abercrombie’s financials don’t exactly paint an encouraging picture.
Secondly, although the firm’s fourth quarter results were strong, there were some things investors should be concerned about — namely the company’s rising inventory. Inventory was up 6% from the year-ago quarter — a worrying trend that could put pressure on margins moving forward.
The Bottom Line on Abercrombie & Fitch Stock
Abercrombie & Fitch stock has certainly made a strong start to the year and investors who were willing to take a chance on the company have seen substantial gains.
However, at current levels, the stock simply doesn’t have much appeal because of the potential headwinds ANF could be facing in the year ahead. Abercrombie’s turnaround has been impressive so far, but a positive outlook has already been priced in.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.