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Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: hoyasaxa who wrote (2582)	7/7/2000 11:45:32 AM
From: TwoBear	Read Replies (1) \| Respond to of 4691

I agree that ANF buyers are mainly the late teen-early twenty crowds, therefore uncomparable to GAP's buyers which cover all categories up to middle aged adults. But, isn't ANF beginning a new kids store called just Abercrombie? Scott

To: hoyasaxa who wrote (2582)	7/7/2000 1:37:31 PM
From: Paul Senior	Read Replies (1) \| Respond to of 4691

Irritates me to read of people calling stocks 'no brainers'. There are NO 'no brainers'. There are no 'no brainers' going into a stock and there are no 'no brainers' coming out of one where it worked out easy and great, just like the person believed it would and just for the reasons that they figured it would. Given that we might all have a different definition of 'no brainer' I just might be totally misunderstanding this. And maybe it's just me - back when I've had what I categorized as 'no brainers' they've often been the toughest, dangerous, slowest stocks to work out for me. (Exacerbated, as there's a tendency to load up on such stocks.) My feeling nevertheless is that people who call stocks 'no brainers' are people with limited investment experience who just are not close enough to the the risks of business as a part of life. It seems to me it's the young Turks who say things like 'no brainer' and not the wizened old-timers. Maybe I've just been surprised one too many times by an earthquake, a bomb, a fire, a customer relations disaster, a business scandal, a surprise government ruling, a gas shortage, etc. etc. "No Brainer" indeed! Harumph, harumph -g- Paul Senior

To: hoyasaxa who wrote (2582)	7/8/2000 12:31:57 AM
From: James Clarke	Read Replies (1) \| Respond to of 4691

Looks like that stirred the pot a bit. OK, Paul, you got me. I shouldn't have used the word "no-brainer", especially after the stock went up. When I went back to look at my original posts on ANF a month ago I wasn't calling it that. So mea culpa. I was just really really happy yesterday. I also never said, and do not believe that this investment is without risk. If that is the way my comments were taken, I wasn't clear enough. Doubling your blackjack bet when there are +20 tens in the deck is a "no-brainer", but you can still lose. The next two months are absolutely critical (back to school season and a significant style shift) if this stock is going to work in the near term. If this season doesn't work, we may find ourselves back at 10 for a while. That said, I would still buy the stock in the mid-teens if I didn't already own it. There is good DCF analysis and bad DCF analysis. I generally don't consider a DCF particularly useful, but when I find a situation where a DCF can tell me something I didn't otherwise know I take DCF analysis very seriously and put a lot of thought into it. I consider ANF an ideal company to model because a) the financials are very simple and the disclosure is thorough; b) something is changing - i.e. there is something to learn from a model. What I am not doing is simply extrapolating the last couple years. Actually I see margins falling considerably - the question of "how much" and "what does that mean for valuation" is pretty tough to get your hands around without some rigorous analysis. Also the valuation of the kind of cash flow dynamics I discuss below are not at all intuitive. If you don't think Abercrombie has a strong brand, you need to talk to some 17-25 year olds. They have incredible mindshare among their target market. I didn't believe it either until I started talking to people in that age group. Now they are trying to do what the GAP did. The new abercrombie stores target 7-16 year olds with the Abercrombie style. With their fall line this year they are edging into Banana Republic/J Crew market with business casual type apparel with an edge. I think Hollister is Abercrombie's Old Navy, though I know little about what they are going to do with this. We'll see if they can pull it off. In 1995, nobody had heard of Old Navy, and I think Baby Gap and Gap Kids were just starting. It took having a baby to understand Baby Gap - they are just incredible retailers. Gap doesn't have a moat like Coke - management is the key here. What Gap and ANF have in common is that they are trendsetters, not followers. Followers are the ones that get stuck with the stale inventory when the leaders change the game on them. Everybody knows Gap is a trendsetter, but Gap trades at 25 times earnings. I would not buy Gap at that price, though I think it is a very special company. The reason Abercrombie is so undervalued is that it is misunderstood - Wall Street doesn't shop there. But their kids do. Institutional investors need to spend some more time with their kids - that is how I got this one bought at my firm. One of the portfolio managers took his kid to summer camp, and half the kids had Abercrombie hats on. And that's not even their target demographic. Abercrombie's financials and the valuation were what initially attracted me. The financials look like very few other retailers. This company generates cash as it grows because by the time they have to pay their suppliers they've sold the merchandise. That requires inventory turns north of 6 or 7 times. There aren't many retailers that can do that. That is a little something I learned from studying Bill Miller. He loves companies with this positive cash flow cycle. Dell is the best example. Amazon may be the next. (I think he also owns Abercrombie though probably at a higher price.) But digging deeper into the financials I found other things to like. Visiting stores and talking to customers I'm starting to see that this is a very good retailer with customer loyalty. And they have no debt. And possibly my favorite thing about this company is its size. They only have 250 stores. To put that into perspective, Ann Taylor has 425, Victoria's Secret has over 800. So the market is by no means saturated. You get your triples and tenbaggers from companies that generate high return on capital AND have the ability to reinvest large quantities of that capital at high returns. (Peter Lynch 101 - I think Dunkin Donuts was the example he used on this point.) When I start seeing Abercrombie stores in strip malls, I'm gone. But that won't happen for 10 years. What makes Abercrombie REALLY special is that even while they are reinvesting large quantities of capital, they throw off large quantities of cash. The Gap or Walmart have high return on capital, but I think they are running out of opportunities to reinvest it. Home Depot is also starting to look very saturated these days. Anyway, we won't turn this into an ANF thread. I'm done on this one. Thanks for the questions to make me think, and for the forum to write a long detailed analysis. I had nothing on paper on this one except my model. Now I do. Hope this is helpful for your own analysis. E-mail me privately if you want to go into anything further - I'd love to know if I'm missing something big here.