Abercrombie shares appear substantially undervalued after a 30% decline on weak prospects for the second quarter

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Abercrombie & amp; Fitch (NYSE: ANF) announced a mixed performance for the first quarter. The clothing retailer's shares were down about 30% due to lower-than-expected sales below expectations, combined with a weak earnings guidance for the second quarter. While the company's same-store sales increased 1% in the quarter, this key measure of the company's largest brand, Hollister's, grew only 2%, as street expectations increased. were 3.3%. Overall, Abercrombie's net sales increased 0.7% (yoy) to $ 734 million, while the Company recorded a net loss of $ 0.29 per share, the expected adjusted loss of $ 0.43 per share.

However, we believe that investors have overreacted to Abercrombie's second-quarter forecast, which includes a one-time $ 45 million charge related to the closure of 3 of its flagship stores. In addition, it should be kept in mind that the first quarter was a particularly weak period for the apparel industry as a whole. That's why we hold back the Trefis price estimate of $ 27 for the Abercrombie shares. Our estimate is about 55% higher than the current market price. We summarized our key expectations for the announcement of results in our interactive dashboard. How Abercrombie & amp; Fitch Fare In Q1 and what can we expect from the year 2019? Plus, here's more Textiles, Apparel and Luxury Data on Industry.

A look at Abercrombie & amp; Fitch's revenue sources

Abercrombie & amp; Fitch reported total revenues of $ 3.6 billion during the 2018 fiscal year. This included two revenue streams:

• Abercrombie$ 1.4 billion in 2018 (40% of total revenues). This brand is a retailer specializing in high quality clothing and accessories for men and women.
• Hollister$ 2.2 billion in 2018 (60% of total revenues). Hollister caters to teens around the world and also includes the intimate Gilly Hicks brand.

Points to remember about Abercrombie's first fiscal quarter

Digital sales continue to flourish

• The digital chain has been critical to Abercrombie's growth over the last few quarters. Bricks and mortars have changed dramatically to the online platform and ANF has invested heavily to develop its Direct to Consumer segment to adapt to this change. The company's strategy is showing results, as evidenced by the fact that digital sales exceeded $ 1 billion in 2018, or about 35% of total sales volume.
• This trend continued in the first quarter, with digital sales reaching 30% of revenue, up from 27% a year earlier, thanks to the strong performance of the Hollister and Abercrombie brands. In addition, the company's direct engagement with the consumer is clear from the fact that its "Pickup in Store" program (which allows customers to place an order online and then pick up the merchandise in-store) has experienced double growth. figures in the first quarter.
• We expect DTC to be the main driver of the company's revenue growth over the next few years.

Hollister still holds key to Abercrombie's growth

• The Hollister brand has been the silver lining for Abercrombie & amp; Fitch in recent years, with steady growth between the bades and channels. The brand recorded a 2% improvement in its first quarter mix, marking its tenth consecutive quarter of metric growth, thanks to strong sales in the sportswear, sportswear, swimwear and sportswear sectors. bath and intimate clothes.
• Hollister achieved record first-quarter sales in pants and outerwear and continued to attract new customers in its growing categories of swimwear and lingerie. Although the brand did not achieve the expected results in the first quarter, Hollister holds the key to Abercrombie's growth in the near future.

Store Optimization Program

• ANF ​​has remodeled, resized and relocated its physical stores in recent years. The number of ANF stores has increased from a peak of 1,100 in 2010 to 861 in 2018, with the company remaining focused on transitioning its presence in retail to smaller and more multi-channel spaces in the best locations that can meet the needs of local and local customers. tourists. In keeping with this strategy, Abercrombie announced its decision to close 3 flagship stores in 2019, bringing the total number of flagship stores sold recently to 5. This represents a reduction of more than 140,000 square feet of buildings that functioned well below the average productivity of the company.
• In addition, the Company plans to close another 40 stores in 2019 and approximately 50% of US stores will be renewed in 2019, giving it the ability to close or redevelop existing stores. The closure of unprofitable stores has allowed the company to increase revenue per square foot, increasing profitability.

International trade has a difficult start to the year

• Abercrombie's international sales were negative 4% in the first quarter, with sales down 6% to $ 264 million. This decrease is mainly due to the weak performance of the company in Asia, where it failed to introduce new offers because some of its products had problems of acceptance in the region. However, international operations have strong growth potential for Abercrombie, which is still under-penetrated in key markets in Europe and China.

Future prospects

• For the second quarter of fiscal 2019, Abercrombie expects the net business figure to be stable, up 2%, while the comparable business figure is expected to be about stable. Gross profit margin is expected to decrease by approximately 100 basis points, while operating expenses are expected to increase by 10%, primarily due to the one-time cost detailed above.
• Based on our forecast for the full year, Abercrombie & amp; Fitch's adjusted EPS for the year 2019 is expected to be around 1.46 USD. Using this figure with our forward-looking C / B ratio of 18.8x, this a price estimate of $ 27 for the company's shares, which is about 55% more than the current market price.

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Abercrombie & Fitch (NYSE: ANF) announced a mixed performance for the first quarter. The clothing retailer's shares were down about 30% due to lower-than-expected sales below expectations, combined with a weak earnings guidance for the second quarter. While the company's same-store sales increased 1% in the quarter, this key measure of the company's largest brand, Hollister's, grew only 2%, as street expectations increased. were 3.3%. Overall, Abercrombie's net sales increased 0.7% (yoy) to $ 734 million, while the Company recorded a net loss of $ 0.29 per share, the expected adjusted loss of $ 0.43 per share.

However, we believe that investors have overreacted to Abercrombie's second-quarter forecast, which includes a one-time $ 45 million charge related to the closure of 3 of its flagship stores. In addition, it should be kept in mind that the first quarter was a particularly weak period for the apparel industry as a whole. That's why we used the $ 27 Trefis price estimate for Abercrombie shares. Our estimate is about 55% higher than the current market price. We summarized our key expectations for the earnings announcement in our interactive dashboard, How did Abercrombie & Fitch manage to stand out in the first quarter and what can we expect from all of 2019 ? In addition, there is more Trefis data on textiles, clothing and luxury goods.

Overview of Abercrombie & Fitch's sources of income

Abercrombie & Fitch reported total revenues of $ 3.6 billion for the 2018 fiscal year. This included 2 revenue streams:

• Abercrombie$ 1.4 billion in 2018 (40% of total revenues). This brand is a retailer specializing in high quality clothing and accessories for men and women.
• Hollister$ 2.2 billion in 2018 (60% of total revenues). Hollister caters to teens around the world and also includes the intimate Gilly Hicks brand.

Points to remember about Abercrombie's first fiscal quarter

Digital sales continue to flourish

• The digital chain has been critical to Abercrombie's growth over the last few quarters. Bricks and mortars have changed dramatically to the online platform and ANF has invested heavily in developing its Direct to Consumer segment to adapt to this change. The company's strategy is showing results, as evidenced by the fact that digital sales exceeded $ 1 billion in 2018, or about 35% of total sales volume.
• This trend continued in the first quarter, with digital sales reaching 30% of revenue, up from 27% a year earlier, thanks to the strong performance of the Hollister and Abercrombie brands. In addition, the company's direct engagement with the consumer is clear from the fact that its "Pickup in Store" program (which allows customers to place an order online and then pick up the merchandise in-store) has experienced double growth. figures in the first quarter.
• We expect DTC to be the main driver of the company's revenue growth over the next few years.

Hollister still holds key to Abercrombie's growth

• The Hollister brand has been the lining of money for Abercrombie & Fitch in recent years, with steady growth of all genders and all channels. The brand recorded a 2% improvement in its first quarter mix, marking its tenth consecutive quarter of metric growth, thanks to strong sales in the sportswear, sportswear, swimwear and sportswear sectors. bath and intimate clothes.
• Hollister achieved record first-quarter sales in pants and outerwear and continued to attract new customers in its growing categories of swimwear and lingerie. Although the brand did not achieve the expected results in the first quarter, Hollister holds the key to Abercrombie's growth in the near future.

Store Optimization Program

• ANF ​​has remodeled, resized and relocated its physical stores in recent years. The number of ANF stores has increased from a peak of 1,100 in 2010 to 861 in 2018, with the company remaining focused on transitioning its presence in retail to smaller and more multi-channel spaces in the best locations that can meet the needs of local and local customers. tourists. In keeping with this strategy, Abercrombie announced its decision to close 3 flagship stores in 2019, bringing the total number of flagship stores sold recently to 5. This represents a reduction of more than 140,000 square feet of buildings that functioned well below the average productivity of the company.
• In addition, the Company plans to close another 40 stores in 2019 and approximately 50% of US stores will be renewed in 2019, giving it the ability to close or redevelop existing stores. The closure of unprofitable stores has allowed the company to increase revenue per square foot, increasing profitability.

International trade has a difficult start to the year

• Abercrombie's international sales were negative 4% in the first quarter, with sales down 6% to $ 264 million. This decrease is mainly due to the weak performance of the company in Asia, where it failed to introduce new offers because some of its products had problems of acceptance in the region. However, international operations have strong growth potential for Abercrombie, which is still under-penetrated in key markets in Europe and China.

Future prospects

• For the second quarter of fiscal 2019, Abercrombie expects the net business figure to be stable, up 2%, while the comparable business figure is expected to be about stable. Gross profit margin is expected to decrease by approximately 100 basis points, while operating expenses are expected to increase by 10%, primarily due to the one-time cost detailed above.
• Based on our guidance for the full year, adjusted EPS for Abercrombie & Fitch for 2019 is expected to be around $ 1.46. Using this figure with our estimated P / E ratio of 18.8x, this gives a price estimate of $ 27 for the company's stock, about 55% higher than the current market price.

What is behind Trefis? Find out how this feeds new collaboration and badumptions

For CFO and financial teams| Product, R & D and marketing teams

All data Trefis

Do you like our cards? To explore for example interactive dashboards and create your own