Abercrombie & Fitch Co. (NYSE:ANF) was down 32% for the year at the beginning of November, but a rally this month has left it down only 11% year to date. One investor who has been buying up shares in the company is Citadel Investment Group, which recently reported that as of November 14th it owned 5.2 million shares of the stock (6.3% of the shares outstanding). Our database of 13F filings shows that as of the beginning of October Citadel had only owned about 120,000 shares of the stock as well as about half a million call and put options apiece. We’d conclude that billionaire Ken Griffin and his investment team have been aggressive in buying up shares this quarter. See what else Citadel reported owning at the end of the quarter.
According to the company’s quarterly report, revenue in the last fiscal quarter (which ended in October) was up 9% from the same period last year, roughly on track with Abercrombie & Fitch’s growth rate in the previous two quarters. Comps were down but the company got strong top-line growth from international markets. However, the big news came on the bottom line. Earnings in fiscal Q1 and Q2 had been considerably lower than a year earlier in both cases, but last quarter outperformed strongly. This is not only good for shareholders directly, but might also be interpreted as a signal that the retailer will have a strong Christmas season (the fourth quarter was responsible for nearly a third of sales in the last fiscal year).
Abercrombie & Fitch Co. now trades at 34 times trailing earnings, but its improvement internationally seems to be driving rosy expectations on the Street. Analyst consensus implies a forward P/E multiple of 13 and a five-year PEG ratio of 0.9, which would on their face be attractive valuation multiples though we’re wary of how much growth is implied by those figures. We’d also note that 15% of the shares outstanding were held short as of the most recent data, so it appears that a number of market participants are bearish on the stock.
Two other hedge funds which each owned over $100 million worth of Abercrombie & Fitch Co. stock at the end of September were Orbis Investment Management and Relational Investors. Orbis, which is managed by William Gray, initiated a position of 4.3 million shares during the second quarter of 2012 (find more stock picks from Orbis Investment Management). Ralph Whitworth’s Relational increased its stake by 29% to a total of 4.1 million shares (research more stocks that Relational Investors likes).
We’d compare Abercrombie & Fitch to other apparel stores such as American Eagle Outfitters (NYSE:AEO), The Gap Inc. (NYSE:GPS), Limited Brands, Inc. (NYSE:LTD), and Urban Outfitters, Inc. (NASDAQ:URBN). Other than Gap, which trades at 17 times trailing earnings, these peers all have trailing P/E multiples in the 20s. So in that sense Abercrombie & Fitch’s trailing P/E multiple doesn’t look that high compared to the rest of its industry. The earnings growth rate at Abercrombie & Fitch is also considerably higher than the moderate increase at Urban Outfitters versus a year earlier; American Eagle and Limited actually saw a decline in net income over the same period. Once again Gap was something of an outlier, though its large earnings growth rate came off of only an 8% rise in revenue. Gap, interestingly, is also the least widely shorted of these retail stocks though none had as large a short interest as Abercrombie & Fitch.
Overall, we can see an argument for Abercrombie & Fitch being a better buy than some of its peers- while its trailing P/E looks high, it is not too much out of place for the industry and the company has been seeing very good financials. However, we still think that Gap is a better value stock.
