ANF’s business trends stink something fierce, as core concepts and growth engines alike have stalled (and crashed). Furthermore, margins are at peak, inventories are at trough levels, and demographic trends remain abysmal in a category that will lose share of wallet in an environment where real consumer spending is likely to go negative for the first time in 64 quarters. That mattered to me six months ago. But after losing 74% of its enterprise value ($5bn flat) over the past year, I’m officially at a point where the stock has overshot the brand value, as well as the strategic and financial call options available to the company. Consider the following…
1) Let’s assume that the consensus EBITDA estimate is 20% too high next year. A $28 stock is getting me to about 2.8x EBITDA.
2) ANF’s brands actually have tremendous value – not unlike Ralph Lauren, Nike and Coach. Kids/young adults wear the apparel bc they want to show off the brand – while a customer at American Eagle, Aeropostale, Gap, etc… could care less if the logo is visible (and in instances, they want to hide it). That customer just wants to wear the look – not the emblem. As a retailer, when you don’t own the customer relationship, you have big fashion risk. But when you are an aspirational destination (like ANF) then fashion risk and gross margin volatility both diminish materially. ANF is one of the few brand families that the consumer will pay up to wear. I think gross margins still come down over time, but they won’t collapse. Similarly, these are the ONLY brands that will maintain some level of ‘take-out’ value. The $7.5EV from a year-ago was glaringly high at the time. But $1.9bn today? This is getting tough to ignore.
3) I think that we’ll see several of these mid-tier brands and retailers go flat-out bankrupt over the next 2 years. ANF will gain share in the mall. Of that, I am near certain.
4) Did you check out General Growth’s stock (GGP)? From $41 to $4 in six months. Yes, this is one of the key mall owners that need companies like Abercrombie to drive traffic. Clearly, as evidenced by ANF’s abysmal comp numbers, it is clear that they are not pulling their weight. But as bankruptcies pick up in the mall, the lease terms will become more flexible for ANF as it gains leverage. I’ve been concerned for a while about the aggressive terms associated with ANF’s leases. The impending turn of events is likely to alleviate my concern to a degree.
5) ANF is yielding a 2.5% dividend – one of the highest in retail. The risk of cutting this is exceptionally low in my opinion. Healthy dividend yield is an important theme right now at Research Edge. ANF fits fight in.
6) CEO Mike Jeffries is a 63 year old control-freak who is involved with virtually decision at the company – to a frightening degree. That’s why he can’t hang on to a CFO. I can’t say with any degree of confidence that sound financial management is a key focus at this company. What I can say is that this team can trade its stock better than just about anyone out there. Check out the sheer volume of shares sold during 1Q and 2Q of this year – almost 1.5mm shares (1.6% of the float) over 3,000 transactions. 10b5-1 sales or not – tough to ignore that the selling pressure stopped when ANF cracked $50 (from $82). At $28, ANF has $600mm in cash to gobble up the stock. My bet is that the management team starts buying first. Either way, I’ll take it.