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O.K. to shop at Abercrombie & Fitch - Just DON'T buy the company

Tuesday, August 19th, 2014

Well it’s mid-August, and that means kids are going back to school. I know many parents are happy about getting the kids out of the house, but money will need to be spent on pens, notebooks and making sure kids show up to school in the latest styles.

So I thought I’d take a look at teen retailer Abercrombie and Fitch(NYSE: ANF).

The stock currently trades about $41 per share. Over the past year, it has been as high as $49.56 with a 52-week low of $31.14. The market cap is on the smaller side at $3 billion.

For those of you who don’t recognize the Abercrombie and Fitch name, this company operates more than one thousand stores throughout the United States, Canada, Europe, Asia and Australia. It also owns Hollister and Gilly Hicks Brand. I also thought it was interesting that this company has been around since 1892 is headquartered in New Albany, Ohio.

Turning to the numbers, I nearly fell off my chair when I saw the PE ratio for the last 12 months coming in at 96.74, well above the industry at 20.1. Price to sales made me feel better, checking in at 0.73 versus the industry at 1.3.

Price to book value also favors the company at 1.9 versus the higher industry at 5.6.

In the last valuation ratio, which is price to cash flow, it, too, favors the company at 11.0 versus 13.24 for the industry. The company does pay a 2 percent dividend and currently uses 160 percent of the earnings over the last 12 months to pay out that dividend.

Over the last 12 months, sales fell by 7.4 percent when the industry saw its sales increase 3.6 percent.

Earnings-per-share year over year for the last 12 months fell by 86 percent when the industry fell by 6.3 percent. After seeing the high price-earnings ratio over the last 12 months along with the earnings per share falling 86 percent, I decided to look at the income statement to see if there was an usual expense that would cause this.

In the quarter ending February 2014, the company took a restructuring charge of $81 million along with an asset impairment charge of $46.7 million. The company also had a $24 million loss for the recent quarter ending May 2014, and a $15.6 million loss for the quarter ending November 2013.

Moving on to the balance sheet, the current ratio looks good for the company at 2.24 -- just less than the industry average of 2.35. Total debt to equity is very good for Abercrombie at 12.4 verses 34.3 for the industry.

Due to the write-offs and the losses over the last couple of quarters, return on equity for Abercrombie is very low -- 2.3 percent compared with 22.9 percent for the industry. Also low because of the write-offs was the net profit margin, which checked in at 0.93 percent, or roughly one-sixth the industry average of 6.4 percent.

Turning to efficiency, Abercrombie has done a very good job collecting on its receivables. Over the last 12 months, the receivable turnover rate is 51 -- more than twice the industry average of 20 times. Inventory turnover for Abercrombie is okay at 3.3 times over the last 12 months, slightly under the industry at 3.4 times.

Looking out to January 2016, fiscal year ending earnings are estimated to be $2.81 per share based on the mean average by 37 analysts. Using a forward multiple of 16.5 times earnings, target sell price on this company is $46.37. While the stock at current levels is not expensive, the potential gain based on the target sell price is only about 13 to 14 percent -- in my opinion, not worth taking the risk.

Over the last four quarters, the company beat the quarterly earnings estimate three out of four times, sometimes by as much as a 30 percent. The peg ratio looks attractive at 0.97, telling investors that they are not paying that much for the future growth over the next five years.

So while teens and parents may be doing back-to-school shopping, the time to buy this company was in January, after the holiday season, when the stock was bouncing around the low 30s.

It does not appear to be a good time to shop for companies that may benefit from back-to-school shopping.


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