Today’s news:
• A review of Abercrombie & Fitch’s (ANF) presentation at the January 13 ICR Conference 2020. ANF moves from Buy to Strong Buy.
• Citigroup (C) reports strong fourth quarter results.
Abercrombie & Fitch (ANF – yield 4.4%) is a specialty retailer of Abercrombie & Fitch (a.k.a. A&F), abercrombie kids, Hollister and Gilley Hicks brand apparel and accessories for men, women and kids. The company operates 677 U.S. stores and another 204 international stores that are heavily concentrated in Europe.
Yesterday, CEO Fran Horowitz and her management team gave a presentation at the ICR Conference 2020 that features growing public and private companies. Horowitz reaffirmed fourth quarter projections and announced a record black Friday week, attaining record revenues at Hollister, abercrombie kids and Gilley Hicks; and the best revenue in five years at the Abercrombie brand. Inventory is well-controlled and “clean” heading into spring.
Fran Horowitz and her team have rebuilt Abercrombie in the last five years. They’ve shifted from being a U.S. business that operates globally to a global business that operates globally, recently adding offices in London and Asia. Corporate goals include topline growth, including an additional $1 billion in annual international revenue in the coming years; expanding gross margins; growing their omnibusiness; continuing to reduce square footage during lease negotiations; and optimizing and modernizing the size and locations of their stores.
Half the Hollister stores have thus far been modernized, resulting in more traffic and revenue increases in the high single digits compared to. those not yet remodeled. The company is specifically reducing their number of flagship stores, which were originally built over a decade ago in high tourist locations; the consumer has changed so dramatically that Abercrombie no longer has the need for such large stores. Therefore, management has thus far reduced the number of global flagship stores from 19 in early 2019 to 15 at year-end 2019, and is aiming for a total of about 12 flagships at year-end 2020 as additional leases expire. Right-sized and remodeled Abercrombie stores are experiencing a huge increase in productivity, despite the lower square footage. But this isn’t a story just about cutting—Abercrombie is one of the few retailers that’s willing and able to invest in their stores, currently planning 85 new store experiences in 2020.
Abercrombie has changed the way they interact with the consumer, using data research and technology to provide an omnichannel experience. Correspondence with consumers is targeted to their individual buying habits. 80% of all purchases begin with consumers using smartphones to visit the Abercrombie website. “Pop-ins” have become Abercrombie’s most profitable customer; i.e. consumers who purchase online and then visit the stores to pick up their merchandise. The firm’s online business now accounts for over $1 billion in annual sales, accounting for at least 28% of annual revenue.
2019 results were impacted by currency movements (costing about $35 million), geopolitical tensions and tariffs. The company’s sourcing from China has decreased from 43% of total merchandise in 2011 to 16% in 2019. Management is expecting remaining tariff costs to drop in half in accordance with ongoing U.S.-China trade negotiations.
ANF is an undervalued small-/micro-cap stock. Wall Street projects EPS to fall in 2019, then rise 82% in 2020. The 2020 P/E is 14.5. The company’s strong management team, small size, profitability and healthy balance sheet make it an attractive takeover target as well as a potentially profitable stock for retail and institutional equity portfolios.
Whether you’re looking for a small-cap growth stock, a dividend stock, a short-term trade or a potential takeover target, ANF can fill the need. Now that the price chart is showing distinct improvement, I’m moving ANF from Buy to a Strong Buy recommendation. The stock has been range bound since June, recently trading more consistently near the top of that range. ANF appears immediately capable of breaking past 18.5 and rising to about 21, offering a 17% short-term capital gain opportunity. I would expect continued upside after the stock takes a periodic rest. Buy ANF now. Strong Buy.
(Please note that while many retailers that finish their current fiscal year on January 31, 2020 refer to this about-to-end fiscal year as “fiscal 2020", Abercrombie & Fitch refers to this as “fiscal 2019". Therefore, Abercrombie & Fitch will refer to February 2020 and beyond as “fiscal 2020".)
Citigroup (C – yield 2.5%) reported fourth quarter 2019 results this morning. Earnings per share of $2.15 beat the estimate of $1.84 and all analysts’ estimates, though that included a one-time tax benefit. Revenue came in at $18.4 billion, above the $17.9 billion estimate and at the very top of the estimate range. Strong results were attributed to the Institutional Clients Group (ICG) and Global Consumer Banking (GCB). The company repurchased 69 million shares during the quarter and 264 million shares during the full year. JPMorgan Chase (JPM) also reported a big earnings and revenue beat today.
Prior to today’s earnings report, Wall Street expected EPS to grow 8.8% in 2020, and the 2020 P/E was 9.6. Investors can expect changes in earnings estimates in the coming weeks. (Depending on the change in the 2020 earnings estimate, I could change my recommendation on the stock.)
The stock is up 1.2% in pre-market, trading this morning at 81.60. C only recently rose above significant price resistance at about 76, and hasn’t traded above 80 since 2008, so the stock has just entered a modern version of new high territory. Nobody has missed the coming run-up. Buy C now. (A brief stock market correction could temporarily pull C back to the upper 70’s, and that would be a buying opportunity.) Buy.