The duration between the bull and bear case should keep this name in the market’s good grace for at least another quarter or two.
Not a whole lot of companies are printing results that we’d refer to as ‘bullet proof’ but ANF clearly did – more than doubling the consensus. We won’t waste time here rehashing what the market already knows about one of the best performing retail stocks in the market (+31% ytd), but what we do know is that you can drive a truck between the bull and the bear case on this name.
On one hand, this is a US-centric brand that needs to shrink its base of once-vaunted US stores due to overbuilding and cannibalization while it pumps more (working) capital into those stores – and only has a well-understood and potentially over-hyped International business to fuel its growth, and $4-5 ultimate in EPS power can’t sustain a $74 stock for too much longer.
On the flip side, the productivity and profitability of its International stores 1500bps higher than US stores, and the pricing power is what some in the trade would refer to as ‘a gift.’ There’s very strong demand and little pricing pushback from consumers in the UK, and now France, and why not Eastern and Northern Europe? Asia? If you want to put your bull hat on here you can build up to $10 in EPS power over 3-years, which suggests that this thing could double – again.
The interesting point on sentiment here is that those that truly believe in this story are not going to be derailed by trouble in the US. They’ve already written it off. At the same time, they’re looking to an international story to play out over 2-3 years. The bears are looking for the weak US business to be more reflective in valuation (after all – few and far between will a retail growth story ever work if the core stalls) and the international business to prove less accretive than is broadly accepted by a consensus that does not have a single ‘sell’ rating out of 27 analysts (does ANF really need 27?). Here’s some fun math… Apple has $5.25Bn in EV per analyst covering, Nike has $2.2Bn, which is spot on with AMZN. ANF has $207mm. (Alas…maybe we’re the pot calling the kettle black.)
The point here is that ANF has been a frustrating short. But when you look at the dynamics behind the long case vs the short case, the short one becomes incrementally difficult to hang your hat on. Of course, once everyone believes that, it’s probably baked in.
While we seriously consider the long-case (as we do with all names that we’ve been both long and short in the past), we’d point to this sentiment alongside the chart below. Yes, it’s our trusty SIGMA. If you don’t look at them, this one is definitely worth a look-see.
Specifically, the latest data point swung it into the upper right hand quadrant – both margins and the sales/inventory spread improving. That’s in a $74 stock. What’s interesting, however is that ANF is about to go up against two-quarters where it’s been in a very ugly place while the industry was sitting pretty. That’s the same time where the rest of retail will be going down and to the left. In other words, this leaves ANF up there with NKE and a select few others that will improve RNOA while the rest of the industry fades. That’s a tough incremental sale on the margin.