“I think that the retail doesn’t seem to be coming back all that great. Abercrombie and Fitch’s numbers were down 58% year over year. Same-store sales were down, what, 20 some-odd percent? This stock is up. There’s no real room for bad news here. All news is good news. I think we’re still running on the jet fuel of the stimulus. The important thing coming out of these retail numbers is will the consumer actually show back up at the party at some point.” — CNBC’s Squawk on the Street 11/13/2009
Abercrombie & Fitch (ANF) reported its results for the third quarter that exceeded analysts’ estimates for EPS of $.20 by a healthy margin. In fact, the clothing retailer earned $.30 per share as sales came in just about in line with expectations at $765 million. While earnings were better than expected, the fundamentals are looking extremely weak in comparison to the same quarter a year ago. Earnings per share have declined 58% and overall sales are down by nearly 15%. Even more troubling, possibly the most important metric for retailers of same-store sales, fell by 22%.
It is somewhat surprising that the market has accepted these results in stride and Abercrombie is soaring nearly 8% higher in Friday morning trading on heavy volume. We would have expected shares would struggle following the weak sales report in combination with the lower than expected reading this morning on the Reuters/University of Michigan consumer sentiment index. This is especially surprising as we believe the market is particularly attuned to company’s showing sales growth or at least resiliency. So far this earnings season, we have seen many companies have beaten earnings estimates through cost cutting, and the market has neglected to push the stock higher. Apparently for ANF, just meeting analysts’ dire predictions was enough to justify the stock’s 71% year to date gains.
Some of this price appreciation could be a due in part to a short squeeze. As of the end of October, Abercrombie was the 18th most shorted stock in the S&P 500 in terms of percentage of short interest by freely floating shares. Some of the nearly 15% of float has undoubtedly been encouraged to cover their positions after the 50% earnings upside surprise.
At Ockham, we had placed a Fairly Valued rating on ANF shares as of this week’s report. While, it is unlikely that we will be downgrading the stock to Overvalued as of next week’s rating, we do have significant concerns over the valuation following the recent appreciation. The stock is up 13% this week, with tremendous gains on both Monday and today. Monday, Abercrombie received a crucial upgrade as Goldman Sachs (GS) added them to their Convection Buy list citing potential for overseas growth as they will likely accelerate store openings in the coming quarters.
However, the price of ANF has moved in pretty much the opposite direction of earnings and sales trends this year. That is a circumstance that we never want to buy into as it is antithetical to our investment style. The stock has made new 52-week highs today and is selling at a multiple of nearly 43x this year’s earnings and 24x next year’s. We would recommend long term investors looking at retail search for a better value as they are definitely available.
