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Abercrombie and Fitch Falls Out of Favor
Tuesday, July 25th, 2017

A little over 10 years ago, Abercrombie and Fitch was one of the hottest retailers around. Talk of expanding the company overseas and controversy about their models lack of sufficient clothing was making headlines. The company has been around well over 100 years and was founded in 1892. It currently operates 709 stores located in the United States and 189 around the world. Two main brand names include Abercrombie and Hollister. Recently, the company has been searching for someone to acquire them but based on their financial statements I do not understand their hurry. As I said, roughly 10 years ago this was a hot retailer and the stock traded at $82 a share in the fall of 2007. Today, the stock trades under $9 per share and the question for a smart investor, is now the time to take advantage of such a low price?

Apparently, the company has fallen on hard times with the most recent yearly earnings of only $.12 for the year ending January 2017. Going forward it does not appear to get much better, looking out to January 2019 the mean estimate of 14 analyst is for the company to lose $.06 per share. The range of the estimates is rather high with one analyst looking for the company to earn $1.41, while the low side analyst believes it will lose $.60 per share. 

Looking at some current valuations for the company, I see price to sales is very attractive at 0.18, well below the industry average of 0.88. The price to tangible book value is also very attractive at 0.52, when the industry average of apparel and accessory retailers is at 4.77. To understand how attractive this is one must realize you are paying $.52 on the dollar for good quality assets of which $421 million is in cash. Lastly, price to cash flow is very attractive at 3.4 well below the industry at 8.2.

Currently the company is paying a dividend with a yield just under 9%. This costs the company about $55 million a year, however for the year ending January 2017 they did have cash from operations of $185 million. With over $400 million in cash, the dividend appears safe. Management could however stop or reduce the dividend to increase their cash.

Sales for the last 12 months year over year have declined by 5.5%, not too excessive but not quite as good as the industry which saw their sales increase by 0.84%. Earnings per share over the same timeframe appears to be the big problem, falling by 134% when the industry saw an increase of 2.1%. It would be important for investors to do research to find the reason for such a big decline in earnings per share.

I am surprised this company is trying to sell itself is because of their strong balance sheet. The company has a current ratio of 2.38 which is very close to the industry at 2.45. I expected to see a good amount of debt with this company and I discovered the opposite, the company has a debt to equity of 22.5 which is better than the industry at 50.9. Abercrombie has a net profit margin of a -0.44% compared with the industry at 4.83%, no surprise to see a negative return on equity of 1.5% for the company yet the industry is a positive 18% which was a delightful surprise.

Looking at the efficiency of the company, Abercrombie is doing extremely well and turning over the receivables for the last 12 months at a rate of 43.4 times, far better than the industry at 26.4. Looking at the efficiency of their inventory turnover for the last 12 months, the industry has a turnover rate of 3.25 not much better than Abercrombie at 3.12. I see no problems with the efficiency of this company or anything else that would concern me.

We held this company in our portfolio more than 10 years ago and sold out around $54 per share after a very nice profit. As usual we sold out before things got crazy and did not sell at the top but based on the current price, we kept a big portion of our profit as opposed to still holding the company at around $9 per share.

Many times, investors want to hold to the very top and unfortunately end up losing by holding on as the fundamentals fall apart. That is the reason it is so important to follow and understand the fundamentals especially the financial fundamentals and not be afraid to sell once it reaches a reasonable price. Investors should also use this as a case study and find any companies in their portfolio in the same situation Abercrombie was in ten years ago. If you find companies in your portfolio that look like Abercrombie did 10 years ago do not be afraid to sell and miss the top, your portfolio will look much better down the road.

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