This Specialty Retailer Looks Good After the Rise

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

Investors should notice the large price swings in the market. However, they should not be dictated emotionally with those swings. They should take advantage of them to buy or sell certain positions in their portfolios. Recently, Abercrombie & Fitch (NYSE: ANF) has experienced nearly 35% daily gain, from $31.18 to $41.92 per share. The significant gain was fueled by its impressive third quarter results. Do the strong results justify the rise, or did the market just overreact? Let’s dig deeper into its reported numbers.

Abercrombie & Fitch is a specialty retailer, which sells a variety of products ranging from sportswear, jeans, and outerwear to personal care and accessories, under Abercrombie & Fitch, Hollister, Abercrombie kids, and Gilly Hicks brands. As of fiscal 2011, it operated around 946 stores domestically in the US and 99 stores outside of the US. In addition, the retailer offers its products via direct-to-consumer channel including its website. In 2011, this channel brought in more than $550 million in revenue, accounting for 13.3% of net sales for the company.

It is good to see that the company sourced its merchandise through 170 vendors globally, with no single factory taking more than 10% of total merchandise. As a specialty retailer, the business is quite seasonal with the majority of revenue occurring in August (Back to School season) and November and December (Holiday).

The third quarter 2012 results came very strong. The revenue was nearly $1.17 billion, 8.8% higher than the same period last year. The net income grew as high as 40.5% to $71.5 million. The EPS was $0.87, a 53% growth compared to Q3 2011. Mike Jefferies, the Chairman and CEO commented

These significantly improved financial results reflect progress on several fronts over the past quarter. Our US chain store business posted healthy growth on top of a strong quarter a year ago, and we saw sequential trend improvement in our international business. Our principal focus remains to execute against our key strategic initiatives to leverage our iconic brands and to continue to be judicious in our use of our shareholders' capital to drive long-term shareholder value.”

However, the overall comparable sales declined 3% year over year, along with the decrease in comp sales across all the brands. For the FY 2012 outlook, it is expected to have the EPS of $2.85 to $3, with mid-single digit percentage decrease in comp sales.

The retailer has quite a strong balance sheet. As of October 2012, it had nearly $2.85 billion in stockholders’ equity, with only $60 million in short-term borrowings and $174.7 million in deferred lease credits. In addition, it had a good chuck of cash, with nearly $350 million readily available. With the incredible 35% advance in the share price, it is trading at $41.92 per share; the total market capitalization is $3.46 billion. Its enterprise value is $3.27 billion.

Based on the management’s expectation, its P/E is in the range of 14x – 14.7x.  Since 2010, the retailer has experienced a significant decrease in operating performance, from an average 29% (2003-2009) to only 4.8% (2010-2012). The decrease was mainly due to the sluggish net margin.

Both of its peers, including Gap (NYSE: GPS) and American Eagle Outfitters (NYSE: AEO), had a triple and double than ANF’s net margin and ROIC, respectively. GAP seems to be the most performing retailers among three, with a 6% net margin and 15.9% ROIC. However, it is paying the least dividend yield of 1.5%, whereas AEO and ANF had a 2.3% dividend yield. All three have quite similar forward earnings valuation of 13x – 14x. GAP is trading at $33.46 per share with the total market capitalization of $16.09 billion. AEO is trading 19.12 per share, with the total market capitalization of $3.76 billion.

Foolish Bottom Line

All three retailers seem to be decent for shareholders to buy for their portfolio. Among the three, I would personally pick GAP as it has the most outperforming business performance. Investors might consider the other two retailers for their income portfolios as have been paying consistent dividends for the last 5 years.

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend American Eagle Outfitters and Gap. 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