Abercrombie & Fitch Co. (ANF): Great Brands And A Great Plan

Earnings are projected to grow to $3.57 and $4.19 over the next two years, or earnings growth of 19.8% and 17.4%, which is outstanding for a 17.1 P/E ratio.  The main reason the shares are not valued higher are the high level of risk perceived in regards to the economy and whether or not the company will be able to deliver increased earnings while closing stores.

Competition

There are a great deal of clothing retailers, all of which cater to slightly different tastes and age groups.  For comparison purposes, I would say the two most closely-related companies are American Eagle Outfitters (NYSE:AEO) and Aeropostale, Inc. (NYSE:ARO).  These two cater to the same demographic as Abercrombie, with American Eagle the most similar.  Aeropostale is more targeted toward value-oriented rather than trend-oriented consumers, however all three companies compete for the teenage dollar.

American Eagle actually trades at a slightly lower valuation of 14.5 times earnings; however, the growth potential of Abercrombie simply is not there.  This year’s earnings of $1.40 are expected to rise to $1.56 and $1.76, for growth of 11.4% and 12.8%.  While this is nothing to turn up your nose at, Abercrombie clearly has more potential, but more risk.

Aeropostale on the other hand, has very nice growth prospects, but is a bit more expensive at about 20 times earnings.  I am hesitant to consider Aeropostale as an investment due to the fact that its revenues have actually declined over the past couple years (same store sales fell 9% for the holiday season this past year).  There is a further 3% decline projected in 2013.  Despite analysts’ projections of earnings growth, I am hesitant to invest in any company with declining sales, especially during an economic recovery.

Conclusion

Out of the three companies mentioned, Abercrombie simply makes the most sense as an investment.  During the earnings call, I will be paying particular attention to the progress of closing (or revamping) the underperforming stores, as well as any planned openings of new stores in untapped international markets, as this will be a major indicator of future growth.

The article Great Brands And A Great Plan originally appeared on Fool.com and is written by Matthew Frankel.

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