Abercrombie & Fitch (ANF) is arguably the most successful stock in the clothing retail space, having risen more than 150% in the last year. However, with the stock pulling back from its peak, there appears to be a buy-the-dip opportunity for investors. Given management’s impressive track record of growth, the share’s attractive valuation, and a market overreaction to the company’s third-quarter guidance, I am bullish on ANF stock.
Abercrombie & Fitch’s Revival
My bullish view of Abercrombie & Fitch stems from the brand’s impressive comeback. A stylish clothing retailer, the company was popular in the 1990s and early 2000s, known for its cool kid image. However, the brand fell out of favor for more than a decade after gaining a reputation for being exclusionary and failing to change with the times. But now, Abercrombie & Fitch has its mojo back and has successfully reinvented itself, driving sales to new heights.
The stock has mirrored the company’s success, rising more than 300% in the last two years. While impressive, the share price has pulled back since the company reported its latest financial results in August of this year. Despite reporting impressive numbers for the second quarter, ANF stock has declined nearly 30% from its 52-week high of $196.99. Rather than worry about the decline, investors would be smart to view it as a buying opportunity.
As mentioned, Abercrombie & Fitch’s Q2 results were strong, with net sales increasing 21% year-over-year to $1.13 billion, surpassing analyst expectations by $40 million. Comparable sales grew 18%, driven by a 21% increase in the Abercrombie brand and a 15% rise in its Hollister brand. Earnings per share (EPS) were even more impressive, jumping 131% to $2.50 and exceeding the consensus forecast by $0.28. The company’s gross profit margin expanded to 64.9%, up from 62.5% the previous year.
Overreaction to ANF’s Guidance
The stellar results reinforce my bullish view of ANF stock. However, investors appear to have been spooked by the company’s third-quarter guidance. Management projected a 13% to 14% operating margin for Q3, down from 15.5% in the previous quarter. This cautious outlook, combined with executive warnings of an “increasingly uncertain environment” sparked a selloff in ANF stock.
This is clearly a market overreaction. Management actually raised its fiscal 2024 net sales growth forecast to between 12% and 13%, up from a previous estimate of 10%. They also increased their full-year operating margin guidance to between 14% and 15%, suggesting an expected improvement in the year’s fourth and final quarter that includes the holiday shopping season.
The post-earnings selloff in ANF stock also ignores the company’s impressive trajectory under CEO Fran Horowitz, a widely respected retail industry veteran. Horowitz’s strategy has driven consistent growth and margin expansion over the past few years and positions the company for future gains. Management recently set an objective of pushing revenue above $5 billion by Fiscal 2026. Abercrombie & Fitch has also moved into wedding clothing and plans to expand into eyewear in 2025. These new areas could be catalysts for the company and its stock.
Abercrombie & Fitch’s Valuation
Another reason to like ANF stock is the valuation. The company’s shares currently trade at 13.7 times forward earnings estimates, representing a 16.7% discount to the consumer discretionary sector. The stock also enjoys a 15.4% discount when measured by its EV-to-EBITDA ratio, trading at 8.55 times.
This data suggests that the market’s reaction to the forward guidance was indeed excessive and creates an attractive entry point for investors willing to look past short-term uncertainties and focus on the long-term growth prospects of Abercrombie & Fitch.
Is ANF Stock a Buy According to Analysts?
On TipRanks, Abercrombie & Fitch’s stock has a Moderate Buy rating from a total of eight Wall Street analysts. This is based on five Buy, three Hold, and no Sell ratings assigned in the last three months. The average price target on ANF stock of $186.29 implies 32.45% upside potential from where the shares currently trade.
Read more analyst ratings on ANF stock
The Bottom Line
While some people might be wary of investing in a stock that has surged in the last few years, the recent pullback presents an opportunity for savvy investors. Shares are currently trading at a significant discount relative to peers in the consumer discretionary sector. I believe the market overreacted to the forward guidance provided by management, and I have faith in the ongoing turnaround strategy at Abercrombie & Fitch. For these reasons, I see a buy-the-dip opportunity with ANF stock.
