This Teen Retailer Is a Good Bet

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Abercrombie & Fitch's (NYSE: ANF) stock price has increased by 38% in the last one year period but the last six months were not accelerating enough. It has reported negative same store sales, or SSS, in the first quarter, which was largely attributed to inventory shrinkage that has been taken care of now. The company has taken cross-functional initiatives to improve its operating process this year and is also looking for better margin levels. Here's a look at these initiatives in detail.

Cross-functional initiatives for profit expansion will increase margins

Abercrombie & Fitch has taken cross-functional initiatives to improve its operating performance. It has divided its initiatives across seven work streams of the business. General non-merchandising expense and marketing work streams will lead to 30% of total expenses for it. The company has identified a $35-$55 million annual savings opportunity in the next 6 to 12 months during the implementation period of this initiative.

It is working on store operations, home office and supply chain work streams for savings opportunities, which are under the validating phase. It also completed its first market research and study in the first quarter, which will help it to explore sales and margin.

International store expansion and direct-to-consumer will drive sales growth

International store sales including direct-to-consumer, or DTC, increased by 10% in the first quarter, and they have contributed around 46% to the total company sales. Abercrombie's international stores are more profitable and providing higher return than its US stores.

China reported comps growth of 40% in the first quarter, and the company will look for more new stores in the Asia region. The company will open its first stores in Seoul and Shanghai this year and increase 20 international Hollister chain stores in this fiscal year.

DTC business is a high margin business, with 42% operating margin level in the first quarter. Abercrombie has upgraded its order management system and increased the online exclusive products. Its international stores expansion and DTC will drive sales growth in the long term.

Share repurchases and increased dividend signals management’s confidence on the stock

The company repurchased 350,000 shares in the first quarter worth $16.3 million. Abercrombie currently has $18.4 million in share repurchases available under board approval. It will look to continue the share purchase activity as margin expansion trends are visible.

It has increased its dividend to $0.20 per share from $0.175 per share of same period last year. Abercrombie's continuous share repurchases strategy and increased dividend is positive signs for investors.

Peer analysis

In the fashion specialty retail segment of the retail industry, the other two major players are American Eagle Outfitters (NYSE: AEO) and Aeropostale. (NYSE: ARO).

American Eagle Outfitters has taken strong initiatives to increase its online sales and invested in the omni-channel network. Its Aerie Brand has better online mix than overall company mix and has. It reported 4% comps in the first quarter.

It has increased its capital expenditure for the year significantly for store expansion and store remodeling. It has also invested in the new distribution centre which will help to supply for demand across channels.

Aeropostale has focused on its better operating performance this year with recently integrated allocation optimization tools. It has reported slightly above consensus results in the first quarter this year, but EPS was -$0.16.

It will look for better performance with more structural changes in merchandising assortment. Its key fashion categories, including color and print bottoms, will drive sales growth. It will look forward to gain market share with increased inventory levels in back to school selling season.

 

P/S ratio

Op. margin

1 Yr. Fwd. P/E

Abercrombie & Fitch

1.15

-1.66

12.68

American Eagle Outfitters

1.32

6.74

11.63

Aeropostale

0.6

-4.53

21.89

Source: Google Finance and Yahoo! Finance

Abercrombie & Fitch reported operating margin of -1.66% and a 1-year forward P/E of 12.68. American Eagle Outfitters has the highest operating margin of 6.74% and lowest forward P/E of 11.63 among the three mentioned peers. Aeropostale has the lowest operating margin -4.53% and a forward P/E of 21.89.

Conclusion

Abercrombie & Fitch has taken strong initiatives to improve its margins growth this year. Its cross-function initiatives with seven identified streams and recently completed market research study will help it to increase margins growth. The company's international stores have better margins, and they will drive margin growth with increased store counts this year. It has a share repurchase program in place and increased its quarterly dividend for the first quarter. Its initiatives will drive its overall growth in the future. So, I will recommend a Buy.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Ash Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure