|
Published: June 7, 2010
Can you imagine anything worse than being a retailer in this
recessionary environment? What if you knew there was a retailer
so adept at reinventing itself while catering to the beautiful
people, that it will survive the recession in very good shape?
As an investor, it would certainly grab my attention.
Abercrombie & Fitch (NYSE: ANF) is perhaps best known for
its controversial print advertisements in which young folk
canoodle while being (scantily) clad in said retailer's
clothing. The company has made neither bones nor apologies about
making sex appeal a cornerstone of its sales pitches.
Abercrombie & Fitch made a choice some time ago to target that
section of the population.
Most other retailers are about functionality. Abercrombie is
about looking good and looking hip. If you've ever been to one
of their stores, it's almost like entering a club. A big placard
with scantily clad young folk blocks your view into the store,
which is counter to every rule of retailing -- let the customers
see your wares from the entrance. Nope, not here. The idea is
akin to the old peep shows at dust bowl carnivals. See the
pictures of the pretty people? You can have that if you just...
step ...inside.
Once inside, you see the clothes and the beautiful salespeople,
all eager to help. That is, they're eager to help if you
actually fit into their clothes. Abercrombie caters to the hip
crowd and doesn't really offer much in the way of -- shall we
say -- clothes of the extra-large variety.
Now I'm not obese, but nor am I slender. I
went into a store and couldn't get a size "large" button shirt
to actually button around me. That's when I realized the store
was not for me, nor the millions of folks like me. Consequently,
I thought the company would not be a worthy investment. I was
wrong. After all, if you look at the really successful
retailers, they tend to do well by either offering highly
discounted products for everyone (Wal-Mart (NYSE: WMT))
or focus on higher-priced merchandise aimed at a very specific
niche, like Abercrombie.
Clearly, the concept works. Abercrombie now has 1,100 stores
worldwide, and generated almost $3 billion of revenue in 2009.
Regrettably, this was the second consecutive year that sales
fell -10%, wiping out any profit the company had last year.
Nevertheless, the company had $225 million in
free cash flow, and more than $550 million in net cash, so
it remains on solid footing.
Analysts see Abercrombie roaring back this year with earnings of
$1.81. Analysts also expect earnings of $2.64 next year, and a
5-year average growth rate of +19.5%. And while 1,100 stores
aren't that much when it comes to covering a planet, Abercrombie
may be well on its way to becoming as ubiquitous as Nike
(NYSE: NKE).
There are risks, however. No matter how pretty the retailer in
question is, it's still retail. If the economy sours further, or
if the fashion trends of the notoriously fickle youth market
swerve too hard and too quickly, Abercrombie could face lagging
sales. That's not to say it won't survive -- half a billion
dollars in cash on hand should prevent that from happening. The
concern, though, is that the growth story will dry up and vanish
very quickly.
That's the other big problem with retail. Things can turn on a
dime. But I don't think this will be the case for Abercrombie.
The company has consistently shown its ability to come back from
hard times and adapt to a changing market.
Action to Take --> With a
5-year growth rate of +19.5%, a multiple of 19.5 is also
reasonable for the Abercrombie. That's below the current
multiple, but earnings should catch up to lower it. Thus, one
might consider
fair value for this year to be right where the stock trades
now, but I think it could hit perhaps $50 next year, for a +35%
return, with +20% annual returns thereafter. I see this as a
good growth story with reasonable risk and consider it a buy.
-- Frederick Steier
Contributor
StreetAuthority |
