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Here's Why Abercrombie (ANF) Stock Seems a Promising Bet

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Abercrombie & Fitch Co. (ANF - Free Report) is well-poised to tap the positive trends in the fashion world, thanks to its digital endeavors and other robust strategies. The company has been gaining from brand strength and solid demand for its products that resonate well with customers. Undoubtedly, management is focused on creating a trend-right merchandise assortment, deepening relations with customers via marketing, enhancing the digital commerce agenda and efficiently controlling expenses.

Buoyed by such strengths, shares of this apparel and accessories dealer have surged a whopping 57.9% compared with the industry’s 18.7% growth in the three-month time frame.

What’s More to Know?

Strategic investments across stores, digital and technology via its Always Forward Plan also bode well. The company has been working toward rationalizing its store base by reducing its dependence on underperforming tourist-driven locations. As part of its store optimization plans, Abercrombie plans to reposition larger format flagship locations to smaller omnichannel-enabled stores. Management expects 35 new stores, 20 combined remodels and right sizes, and 35 closures for fiscal 2023.

We note that Abercrombie has been witnessing favorable margin trends, mainly driven by lower freight costs and improved average unit retail (AUR). Abercrombie’s gross margin expanded 570 basis points (bps) to 64.9% in third-quarter fiscal 2023. The increase can be attributed to a 200 bps gain from reduced freight costs, a 250 bps impact of AUR growth and a 200 bps gain from lower inventory write-downs, partly offset by an 80 bps impact from increased raw material costs. The company reported an operating income of $138 million, up from an adjusted operating income of $21 million in the year-ago period.

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The company has been witnessing momentum in its Hollister label. Brand-wise, net sales improved 11% year over year at Hollister and advanced 30% at Abercrombie in the third quarter of fiscal 2023. The Abercrombie brand contributed 52% to the total company sales while Hollister represented 48% of sales.

Driven by the robust year-to-date performance and expectations of solid demand trends in the upcoming holiday season, management raised its sales and operating margin guidance for fiscal 2023. It envisions year-over-year net sales growth to be 12-14% for fiscal 2023, up from the prior-stated 10% growth. Fiscal 2023 includes a 53rd week, which is estimated to benefit sales by $45 million.

For fourth-quarter fiscal 2023, the company expects sales growth to increase year over year in the low-double digits. For the quarter, the operating margin is envisioned to be 12-14% compared with an adjusted operating margin of 7.7% in the year-ago quarter. This growth is expected to be driven by a higher gross margin on lower freight costs and higher AURs.

Abercrombie is on track with its 2025 Always Forward plan, which focuses on brand growth, leveraging its omnichannel capabilities, and expanding digital penetration and financial discipline. As part of this plan, the company had earlier provided a financial outlook for fiscal 2025 and a long-term view. For the long term, management expects annual revenues to be $5 billion and an annual operating margin rate of 10% or more.

Given all the positives, Abercrombie stock seems to deserve a place in your investment portfolio. Analysts also seem quite optimistic about the company. The Zacks Consensus Estimate for fiscal 2023 sales and earnings per share (EPS) is currently pegged at $4.2 billion and $5.74, respectively. These estimates show corresponding growth of 13.3% and 2,196% year over year. The consensus mark for the next fiscal year’s sales and EPS is $4.3 billion and $5.75, respectively, reflecting a year-over-year increase of 3% and 0.2%. A VGM Score of B further adds strength to this current Zacks Rank #1 (Strong Buy) company.

Eye These Solid Picks Too

We have highlighted three other top-ranked stocks, namely Gap , American Eagle (AEO - Free Report) and Hibbett .

Gap, a fashion retailer of apparel and accessories, currently sports a Zacks Rank of 1. The company has a trailing four-quarter earnings surprise of 137.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Gap’s current financial-year EPS suggests growth of 385%, from the year-ago reported figure.

American Eagle, a leading apparel retailer, currently sports a Zacks Rank of 1. AEO delivered an earnings surprise of 23% in the trailing four quarters.

The Zacks Consensus Estimate for American Eagle’s current financial-year sales suggests growth of 5% from the year-ago reported figure.

Hibbett, the key sporting goods retailer, currently carries a Zacks Rank #2 (Buy). HIBB delivered an earnings surprise of 24.2% in the trailing four quarters.

The Zacks Consensus Estimate for Hibbett’s current financial-year sales suggests growth of 1.7% from the year-ago reported figure.


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