Abercrombie & Fitch May Return to Fashion on the Discount Rack

Fashion trends come and go, but here's a little number that may be coming back into vogue in the coming year -- Abercrombie & Fitch(ANF Quote).

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The lifestyle clothing retailer has taken recent lumps along with the rest of the retail industry, but more than some competitors like Gap(GPS Quote), Abercrombie looks like it may be able to dress the part for a recuperating market.

"I think there's [room for] a lot of growth, a lot of profitability, and there may be some recalibration of earnings margins," said Barbara Miller of Goldman Sachs. (Miller recently reduced fourth-quarter earnings estimates.) While the retail sector has crumbled in the second half of this year amid higher interest rates and concerns about a weakening economy and disappointing holiday sales season, there may be an upside potential for some of these stocks in the coming year. Today's Stock in the Spotlight takes a look at what might be hanging on Abercrombie's financial racks next year.

The Reynoldsburg, Ohio- based retailer most recently expanded its product line to a set of five stores selling surf and skate wear under the Hollister name. This step away from the classic preppy persona that has always been notably Abercrombie comes in conjunction with a re-prepifying of its classic Abercrombie & Fitch stores. After moving away from the classic Hahvahd wear, A&F recently moved back to a more tailored, less rumpled look, hoping to regain greater market share. While sales of its men's clothing have been less than ideal, the company's relatively new line of women's clothes has been performing impressively.

The Abercrombie File

Operations

Business: Clothing retailer

FY 2000 Revenue: $1.04 billion

FY 2000 Earnings Per Share: $1.40

2001 Estimated Earnings Growth: 16%

Stock Snapshot

52-Week Range: $8 - 31.3

Percentage Change from Jan. 1: - 42%

Market Cap: $1.6 billion

P/E Multiple: 10.4

Shares Outstanding: 99.1 million

"They basically had a tough time last year because they missed the fashion trends," said Mark Sellers, an analyst with Morningstar. The new push for hipness is coming on strong as the holiday season moves into its final lap. Miller noted that A&F has become "more promotional earlier in the season" this year. "More promotional" means lowering prices to attract customers, which in turn leads to reduced profit margins. Stores would then need to boost sales to make up for the loss in price revenue. This season, A&F is not alone in this effort.

The benefits of lower prices is that "with their price points coming down, they're moving more into the zone of their competitors," said Miller. To make up then for the smaller margins, they "opened a ton of new stores to keep their revenue up," according to Sellers.

One of the major worries of the retail clothing industry in a tightening economy is that they may have opened too many stores, and now must shut some down. Because of natural time delays within the industry -- signing leases on land and buildings, construction, and so on -- stores cannot be closed at the first sign of waning demand. Thus overexpansion during a strong market places huge financial burdens on retailers when the market begins to slow again.

5 Day

5 Year

But Sellers says A&F is in fact still expanding, and that they may not have overextended themselves in the robust market and may not need to reduce store numbers in the coming year.

"Abercrombie definitely has a lot of long-term growth potential given that they have a smaller store base," Miller said. Insert chart

Retail stocks are pretty beaten up as the year rolls to a close, and most are hoping to make it to the new year with the shirts on their backs. While the A&F stock has dropped almost 42% in the year to date, it has rebounded since the Nasdaq peak on March 10. The stock is up almost 80% in the past six months.

Analysts estimate that the company will post earnings growth of 16% for the fiscal fourth quarter. Estimates for earnings growth for the following year are 20%, while the five-year estimated growth rate is a whopping 40%, according to Baseline.

The real beauty lies in the price-to-earnings and price-to-sales ratios sported by the retailer. With a P/E of 10.3, Miller notes that it is trading at under 10 times its fiscal year 2001 estimated earnings. The company's price-to-sales is an impressively low 1.55.

Below is a list of mutual funds that have been hanging a bit of Abercrombie in their wardrobes, hoping that sooner rather than later the preppy wear is going to come back into fashion.

Funds With the Biggest Stake in Abercrombie & Fitch
Fund	Percentage of Assets in ANF	1-Week Return	YTD Return
(ICASX Quote)IDEX CASE Growth A	5.5%	-12.8%	-40.6%
(SSCVX Quote)Seligman Small Cap Value A	2.6	-0.1	17.2
Alpha Analytics Value	2.4	-	4.0
Source: Morningstar. Performance through Dec. 19.

Background Check Check out these recent TheStreet.comstories on ANF

Abercrombie & Fitch Beats Estimates, Cautious on Holidays (11/7/00) : Abercrombie & Fitch beat Wall Street's expectations for the latest third quarter and said it was comfortable with fourth-quarter guidance, even though the company . . . more

Abercrombie Rolls Up Its Sleeves for a Good Old Preppy Turnaround (7/28/00) : Abercrombie & Fitch is going back to prep school. After seeing its sales and stock price slide this year, the once-sizzling retailer is trying to recapture its buzz . . . more