S.A. Team

About the Author S.A. Team

Smarter Analyst was established to fill a gap in financial reporting for sell-side investors, where they can read exclusive reports in real time. Smarter Analyst provides coverage of equities research, unique analyst insights, and outstanding articles from knowledgeable contributors, in addition to the latest stock market news, all hand-picked by our editors.

Is Now the Time to Invest in Struggling Abercrombie & Fitch Co. (ANF)?

Shares in Abercrombie & Fitch Co. (NYSE:ANF) are suffering now more than ever. The stock plunged from $12.17 to $9.95 on July 10 after Abercrombie released a statement saying that it has terminated acquisition talks. Investors had hoped that expressions of interest in the stock, reported on May 10, would result in an ANF sale- perhaps to fellow retailer American Eagle Outfitters with the backing of Cerberus Capital Management. Indeed, the news that a sale was on the cards caused share prices to spike by 12%. But the positive spirit was short-lived.

Now ANF has announced that instead of a sale it plans to boost its flailing stock price by a rigorous business plan rather than a sale. The company listed efforts to revitalize ANF and solid comp store sales momentum for its Hollister brand as signs of hope. But with shares down since about 2011, when ANF was trading at $77, his words clearly did not provide the market with much confidence. The stock has been plagued by falling revenue, store closures and shrinking margins (from EBITDA of 13.3% in 2012 to 6.46% in 2016).

However, for investors looking for a risky, but potentially profitable, stock purchase, could ANF be the one? At under $10 prices of the stock are now so low that should ANF manage to turn itself around then this could be a bargain price. Are there any reasons why investors could still be bullish on ANF stock? We take a closer look here:

  1. The poor fundamentals are already factored into the low stock price. It would be very difficult to deny that ANF is facing a very challenging outlook, but ANF is now trading at an EV to TTM EBITDA multiple of 3.41x. Compare this to the average for the sector of 8.06x and for the whole market of 12.13x (not including financial companies)- and you have to wonder if ANF is really so much worse than other struggling retailers/ companies. For a start, the statement was correct in pointing out that Hollister is experiencing 3% comparable store sales growth- which is strong compared to Abercrombie’s -10%. At the same time, Abercrombie can cover all its current liabilities with its $421 million cash pile (or equivalents) while the debt-to-capital ratio is actually a fairly impressive 18.4% (much lower than the industry average). Perhaps this is why management continues to pay out its $0.20 quarterly dividend- which it would surely stop if the company was in serious financial danger.
  2. First quarter results, announced on May 25, turned out to be above expectations, with the company reporting revenue of $661 million ($9.84 million better than the consensus). Following the results shares notably jumped from $12.20 to $14.05- but the recent fall in prices eliminates the gains established from the results release. With Q2 results coming up at the end of August, we will have to wait a while for the next earnings report but it could also have the potential to boost prices.
  3. While this round of talks may have ended unsuccessfully, the door to a deal has not been shut forever. ANF still makes a ripe takeover target, and if efforts to turnaround the stock are slow to bring about the desired effect, then the board may have little choice but to re-contemplate a sale as a viable way of creating much-needed value for shareholders. If talks recommence, it is very likely that shares would also move higher.

It must be said that the word on the Street is hardly positive. The stock has a Moderate Sell rating with 6 hold and 3 sell ratings published on the stock in the last 3 months. We can see from the stock’s analysis page on TipRanks that not only has ANF seen a series of downgrades, but the last buy rating on the stock comes as far back as 8 months ago. Meanwhile, with prices down, the average analyst price target of $11.83 now stands at an 18% upside from the current share price.