Tag: Inc. (M).

Is Abercrombie’s 150% Stock Gain Justified?

Posted on by The INO.com Team

Abercrombie & Fitch Co. (ANF), a digitally-led, omnichannel specialty retailer of apparel and accessories, has shown outstanding growth, with the stock surging nearly 150% over the past year despite a challenging macroeconomic environment. This substantial rise in value has drawn attention to whether the company’s growth trajectory justifies its current stock price or if a correction is on the horizon.

By analyzing ANF’s earnings, revenue growth, and future sales forecasts, we can evaluate whether the company is positioned to sustain these gains and remain a compelling investment in the retail sector.

Solid Second-Quarter Earnings and Revenue Growth Despite Retail Headwinds

ANF’s recent financial performance has exceeded analysts’ expectations, positioning it as a leading player in the retail sector. For the second quarter that ended August 3, 2024, the company reported record net sales of $1.13 billion, representing a 21% increase year-over-year with comparable sales growth of 18%. That surpassed analysts’ revenue estimate of $1.09 billion.

The strength of Abercrombie’s brand portfolio and enhancements to its global capabilities drove broad-based growth across regions, brands, and channels. The Americas led its performance in the last quarter, with net sales growth of 23%, building on the previous year’s 19% growth. Meanwhile, its EMEA region also delivered solid results, with a 16% rise in net sales.

By brand, Abercrombie saw a remarkable 26% year-over-year growth, matching last year’s performance, while Hollister experienced a strong rebound, achieving 17% growth thanks to better-than-expected summer and back-to-school selling. The retailer’s gross profit rose 26% from the year-ago value to $736.26 million.

Further, ANF’s operating income was $175.63 million for the quarter, a sharp improvement from $89.84 million a year prior, reflecting strong operational efficiency. Its net income was $135.38 million, an increase of 130.5% from the prior year’s quarter. The company posted net income per share of $2.50, compared to the consensus estimate of $2.22, and up 127.3% year-over-year.

ANF’s impressive financial performance contrasts sharply with the broader retail environment, where many companies are struggling with weak consumer demand and supply chain disruptions.

Retail giants like Macy’s, Inc. (M) and The Home Depot, Inc. (HD) have lowered their annual sales forecasts, citing slower discretionary spending. In contrast, Abercrombie has managed to buck this trend by revamping its merchandise and focusing on clearer brand identities. The introduction of dressier apparel and fashion-forward items like cargo pants has resonated with shoppers, helping the retailer expand its customer base and attract fashion-conscious buyers.

Moreover, ANF recently expanded the Abercrombie Kids with Haddad Brands partnership. The company’s partnership with Haddad Brands will focus on creating new distribution channels for the brand and expanding the product line by introducing infant and toddler categories, complementing the existing assortment for children aged 5 to 14.

Raised Full-Year 2024 Guidance

Abercrombie’s remarkable second-quarter performance led the company to raise its full-year sales forecast. It now expects net sales growth between 12% and 13%, up from its previous guidance of 10%. The company also raised its operating margin in the range of 14% and 15%. This upward revision is notable given the broader retail sector’s challenges, including inflationary pressures and shifts in consumer behavior.

Fran Horowitz, ANF’s CEO, said, “We delivered a strong first half of the year, and we are increasing our full-year outlook. Although we continue to operate in an increasingly uncertain environment, we remain steadfast in executing our global playbook and maintaining discipline over inventory and expenses. We are on track and confident in our goal to deliver sustainable, profitable growth this year, while making strategic long-term investments across marketing, digital and technology and stores to enable future growth.”

Moreover, Horowitz emphasized Abercrombie’s focus on disciplined execution, particularly managing inventory and expenses while investing in marketing, digital channels, and store expansion. This strategy appears to be paying off as the company continues to post record results and improve profitability.

Analysts’ Optimism and Future Potential

Analysts remain bullish on Abercrombie’s stock, with several raising their price targets following the company’s latest earnings report. Citigroup recently upgraded their rating on ANF stock from Neutral to Buy. Also, Jefferies analyst Cory Tarlowe reiterated a “Buy” rating on ANF, increasing the price target from $215 to $220.

In addition, Dana Telsey from Telsey Advisory Group maintained an “Outperform” rating on the stock, with a price target of $208, while CFRA analyst Zachary Warring upgraded ANF from “Hold” to “Buy,” raising its price target to $198. These price targets suggest that analysts see further upside potential, driven by the company’s strong brand momentum, successful digital marketing strategies, and robust balance sheet.

Bottom Line

ANF’s around 150% stock gain is more than just a reflection of short-term market vitality; it is backed by solid earnings growth, impressive revenue expansion, and a positive outlook in a challenging retail environment. The company’s ability to revamp its product offerings, focus on profitability and raise its full-year guidance demonstrates that it is well-positioned to continue outperforming its peers.

While the stock experienced a nearly 17% drop following its last earnings report, this can largely be attributed to investor expectations of an even larger guidance increase. However, the fundamentals remain strong, and Abercrombie’s strategic initiatives and disciplined execution suggest that the stock’s rally could have more room to run.

With its robust brand positioning, expanding customer base, and operational efficiency, ANF could be an attractive buy for investors seeking exposure to the retail sector.

Analyzing the Future of Retail Stocks and How Investors Can Stay Ahead

Posted on by The INO.com Team

After registering 0.2% and 1% declines for two consecutive months, on May 16, the advance sales report showed a recovery of 0.4% in retail sales for April. However, this modest rebound missed the Dow Jones estimate of a 0.8% increase.

This muted outlook has also been reflected in the first quarter earnings of Macy's, Inc. (M). Although the mid-tier retailer surpassed the earnings estimates for the quarter, a spring pullback has caused it to miss its revenue estimates and slash its top- and bottom-line guidance for the entire year.
Given the prevailing demand softness in the unfavorable macroeconomic environment, M expects sales of $22.8 billion to $23.2 billion for the year, down from the previous expectations of $23.7 billion to $24.2 billion. The company now expects earnings per share of $2.70 to $3.20, significantly down from the previous guidance of $3.67 to $4.11.

With M joining its peers, such as Nordstrom, Inc. (JWN) and Dollar General Corporation (DG), in reporting lackluster performances, let’s explore what this means for the prospects of retail businesses relative to another sector that has been claiming a greater share of consumers’ budget lately.

U.S. domestic consumption has been on a roller coaster ride over the past three years. People have gone from not being free enough to spend practically-free money to spending like there’s no tomorrow.

That, in turn, led to a not-so-transitory inflation, the hottest since the 1980s, forcing the Federal Reserve to implement ten successive interest-rate hikes in a little over a year to take the Fed funds rate to a target range of 5% to 5.25%.

With consumer debt pushing past $17 trillion to come in at an all-time high during the previous quarter, average American consumers have been forced to rein in their urge to splurge to prevent inflation from biting harder. The Survey of Consumer Expectations for April carried out by the New York Fed showed that the outlook for spending fell by half a percentage point to an annual rate of 5.2%, the lowest since September 2021.

As a result, the middle-income and aspirational consumers have been forced to go bargain hunting to squeeze out the maximum possible value from money which has gotten dearer, as has been witnessed in other periods of economic slowdown throughout history.

Hence, they have been forced to trade down to budget-friendly retailers, such as Walmart Inc. (WMT), which usually cater to low-income consumers leaving the businesses that offer something in between being wrong-footed and stranded.

Although budget retailers have lost sales from low-income consumers, that loss has been offset by increased business from the middle-income consumer segment, who have been frequenting such stores to shop for groceries and other non-discretionary products, contributing to most of the sales.

Consequently, weaker sales have cut across Macy’s brands, including higher-end Bloomingdale’s and beauty chain Bluemercury. According to CEO Jeff Gennette, the “aspirational customer” who shopped more luxury brands has dropped off as stimulus money has dried up.

Likewise, warehouse club Costco Wholesale Corporation (COST) found its famous $1.50 hot dog and soda combo back in the headlines as inflation bit harder to squeeze pockets further. The hot dog combo and its rotisserie chicken, whose price has been pegged at $4.99 since 2009, are the retailer’s loss leaders that lure in customers who are likely to buy other items as well.

This could be helpful, especially in times like these in which, according to CFO Richard Galanti, even COST’s relatively well-to-do members are ditching pricier beef products for cheaper meats such as pork and chicken, while others are bypassing the fresh meat aisle entirely and opting for cheaper canned meat and fish products with longer shelf life.

However, a decline of 0.3 percentage points in the overall outlook for inflation over the next year suggests that things could improve, but probably not before they worsen.

Despite current economic uncertainties and hardships, high-income segments have been relatively unaffected, with affluent patrons queueing up for finer things in life on offer from the likes of Tiffany & Co. and LVMH.

Another sector that’s seemingly unaffected by the mundane hardships of the retail businesses is the colorful world of leisure travel. While the pandemic is firmly in the rearview mirror, there is enough pent-up demand from consumers ever keener to redeem their pile of airline miles and other travel rewards on their credit cards through revenge travel.

Moreover, with a jump of 0.8% in spending in April, with personal consumption expenditure beating estimates to rise 0.4% for the month despite ten consecutive interest-rate hikes by the Federal Reserve, it isn’t difficult to connect the dots and understand why airlines, such as American Airlines Group Inc. (AAL) have turned to bigger airplanes, even on shorter routes, to help ease airport congestion and find their way around pilot shortages.

As a result of this tailwind, AAL’s revenue surpassed the airline’s cost to help it report a $10 million profit during the first quarter of the fiscal year. Moreover, with fuel prices yet to rise significantly due to a stuttering recovery of the Chinese economy and Memorial Day travel topping 2019 levels, the operator has raised its adjusted earnings outlook for the second quarter.

Down at sea, cruise liners such as Norwegian Cruise Line Holdings Ltd. (NCLH) have also found it smooth sailing, with the cumulative booked position for 2023 coming in higher than 2019 levels and occupancy of 101.5% during the first quarter also exceeding the company’s expectations.

The increased demand for, and consequently expenditure on, services and experiences are also evident in the recent employment data, with leisure and hospitality adding 208,000 positions out of the expectation-beating private sector employment increase of 278,000 for the month of May. The sector was also a notable contributor to the increase of 339,000 in non-farm payrolls for the month.

The altered priorities of consumers are also reflected in the stock price action. While M’s stock slumped by more than 19% YTD, AAL and NCLH gained around 19% and 43% over the same period.

Looking Ahead

While it would be an understatement to say that the momentum is firm in the travel and hospitality sector, it might be wise to consider certain things before indulging in the willful suspension of disbelief and extrapolating beyond the foreseeable future.

Since the rise of remote work and virtual teams, facilitated by contemporary collaboration and productivity tools, seems to have become an immune and immutable remanent of the cultural sea-change our work and lives had to adopt and adapt to during the pandemic, new reports give us reasons to doubt whether business travel is ever going back to normal.

In such a situation, with traveling for leisure being an occasional indulgence in most of our lives, there are risks that the pent-up demand might not be enough to sustain the momentum that is propelling the growth performance of travel and hospitality businesses.

Moreover, since technology companies such as Apple Inc. (AAPL) and Meta Platforms, Inc. (META) are finding increasingly innovative ways to immerse people in experiences without needing them to leave their homes, long-term investors with significant leisure and travel sector could find themselves looking nervously over their shoulders over time.

However, businesses in the retail sector, especially the non-discretionary variety, should be able to help their stakeholders sleep easily, knowing that while wants and desires are temporary, needs are permanent, and technology can’t single-handedly fulfill them (yet).