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Abercrombie and Fitch - The Art of the Thong

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May 15, 2010 – Comments (2) | RELATED TICKERS: ANF

There was an on-line article several weeks ago, which quite frankly, we thought was a big lot of baloney. The article explained that consumer spending, supposedly 70% of economic activity, had surpassed it's pre-recession peak.

As we said, we think such a statement is big load of hot air, something a recent Gallup Poll seems to support.

So we were not at all surprised, given the news of recent weeks about consumer spending, to get several requests for our thoughts on T-shirt and thong retailer Abercrombie and Fitch Company (NYSE: ANF).

Basis

Financial information related to Abercrombie and Fitch Company, contained in this report, is based on the company's most recent SEC Form 10-K filing for fiscal year ending January 30, 2010, as filed with the Securities and Exchange Commission on March 29, 2010.

What They Do

The and company is a specialty realtor that operates stores and direct-to-consumer operations selling casual sportswear apparel, including knit and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women and kids under the Abercrombie and Fitch, abercrombie kids, and Hollister brands.

In addition, the company operates stores and direct-to-consumer operations offering bras, underwear, personal care products, sleepwear and at-home products for women under the Gilly Hicks brand.

As of January 30, 2010, the Company operated 1,096 stores in North America, Europe and Asia.

In June 2009, the company's Board of Directors approved the closure of the Company’s 29 RUEHL branded stores and related direct-to-consumer operations. The determination to take this action was based on a comprehensive review and evaluation of the performance of the RUEHL branded stores and related direct-to-consumer operations, as well as the related real estate portfolio, and was completed during the fourth quarter of Fiscal 2009.

Short-Term Investment

The stock price is trending down, the problem at least to us, is that the time to have taken a short-term position was back in the first part of the month, although there are signs that is starting to change.

When we look for a short-term entry position, we like the Stochastic trend line to be in the oversold range and the short-term MACD trend lines starting to form a bottom. In the case of ANF, the MACD lines are favorable but the Stochastic lines are not.

In addition, should our short-term strategy not work to our advantage, we also want as large a delta between resistance and support as we can get. With a recent close at $40.22 and first resistance at $45.36 and first support at $37.03, the 5% positive delta is simply not enough for us to get to excited about a short-term trade at this time.

Long-Term (5 Year Hold) Investment

We admit that we were surprised with several of the metrics that we initially focus on, assuming that with the economic climate of the past 18 months or so, these metrics would not be to exciting. However, the company's Current Ratio at 2.79, Quick Ratio at 1.79, and Cash Ratio at 1.59, all impressed us.

The company's Total Debt per share of $1.25 was up about $0.11 year over year, but considering that the cost of money is fairly inexpensive, we considered the increase negligible.

We also noted a significant improvement in the company's receivables collections with a year over year decrease in Days Receivables outstanding of 43. This is a dramatic improvement and highlights at least to us, that management is exhibiting a strong entrepreneurial spirit.

Valuations

Based on our review of the company’s FY10 financial information, we think a Reasonable Value Estimate for the stock is in the $56 to $61 range, and that a reasonable entry target is in the $25 to $30 range, an entry point supported by our Graham number of $32, and our Relative Value number of $43.

Final Thoughts

The company reported a decline in April of 7% for same store sales, something we assumed would be the case for all of FY10. However, having had an opportunity to take a short peek at the company's financials, we're not so sure that the stock price won't just weather the ongoing economic slump.

Certainly, the winds of change are becoming stronger and stronger, and it is our opinion that over the next several quarters, retailers in general are going to have some pretty tough times.

But if company management can continue to keep their collective heads in the game, the longer time outlook for the company should remain fairly positive, what with bikinis, T-shirts, and thongs, seeming never to go out of vogue.

Wax


To download the Wax Ink Abercrombie and Fitch Raw Value Worksheet, please click here.

2 Comments – Post Your Own

#1) On May 15, 2010 at 4:26 PM, hybridinvestor (89.34) wrote:

ANF without even another 30%+ haircut is a risky stock which for whatever reason keeps being given the benefit of the doubt.  I'll pass and put my money into American Eagle (AEO) with looks quite a bit more attractively priced, has a better divvy, and more consistent revs/profits and management.  Oh yeah, and I can't say I remember AEO trying to sell thongs to 8-10 year olds.  That seals the deal for me!

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#2) On May 16, 2010 at 7:00 AM, wax (97.62) wrote:

hybridinvestor;

To us there are no stocks that come without risk, and if you invest for the longer-term, at some point you will find yourself holding one or more stocks that have taken a 30% haircut, it is simply the nature of investing.

It is the reason we attempt to determine what to us is a reasonable value for the stock, and then set a buy target at roughly 50% of that reasonable value.

Investing in such manner allows that our analysis may be flawed, that there may be unknown news about the company, that the cow got stuck trying to jump over the moon, or host of other things.

It is not a perfect way to invest, and it requires a huge amount of work. But it is the best hedge we have come up with aside from not investing at all.

Wax

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