ANF has dropped to under $27 -- any interest here?
To narrow the list to the top stocks, we graded each contender on three factors:
Valuation:
By looking at such ratios as price/earnings, price/sales and price/earnings-to-growth — a measure of how much investors are paying for projected earnings growth — we assessed whether the stock was trading at a bargain.
Fundamentals:
To get a sense of each company's underlying financial and management strength, we measured debt levels, return on equity, long-term growth rates and same-store sales — the change in revenue at shops that have been open at least a year, a key indicator in retail.
Buzz:
Based largely on our interviews with teens and industry insiders, we gauged the excitement surrounding each brand and whether it seemed to be on an upswing. Once we totaled up the scores, five stocks wound up at the head of the class.
Abercrombie & Fitch (NYSE:ANF - News)
Stores: 344 Abercrombie & Fitch, 166 abercrombie, 104 Hollister
Valuation: A
Fundamentals: B-
Buzz: A-
The first thing you notice when you walk into the Abercrombie & Fitch store in Garden State Plaza isn't the clothes. Not the faded jeans, the polos, the hoodies or the T-shirts sporting vintage logos. No, the first thing you notice is the help — petite blondes in tank tops and military shorts, and a hunky guy with his shirt unbuttoned to reveal well-toned pecs. It's like seeing the retailer's controversial catalog, the one you must be 18 to buy, come to life — sans nudity, of course.
Abercrombie, as you may have guessed, is about more than selling clothes. It's about selling an image, an attitude that teens want to be a part of. And as the "aspirational" brand in its category, the company can charge higher prices. For the most part, kids eat it up. In each of the past four semiannual surveys conducted by U.S. Bancorp Piper Jaffray, high schoolers named Abercrombie & Fitch their favorite clothing brand. And with $1.6 billion in revenue, it is now the largest teen apparel retailer on the block.
Abercrombie takes pains to protect the brand's mystique: no television commercials and no aggressive discounting. "The management team is very savvy," says Francisco Alonso, a retail analyst with T. Rowe Price. "They're maintaining their price integrity to protect their brand, which is their most valuable asset." That strategy may have cost the company during the downturn — same-store sales have declined 7% a year, on average, over the past three years — but should serve it well long term. And by not discounting, the chain has kept its operating margin near 20%, one of the highest in the industry. Abercrombie & Fitch clothes may be expensive, but the stock certainly isn't. Its P/E of 15, based on 2003 earnings estimates, makes it quite a bargain. And that's assuming only moderate 12% earnings growth this year. Analysts think the pace will pick up after that, to a 17% annual clip over the next five years.
Credit CEO Michael Jeffries for directing the expansion of the New Albany, Ohio-based company from 36 stores, when he took over in 1992, to more than 600 today. The question now is this: Having nearly saturated its market, how can the company sustain that kind of growth? Jeffries thinks he has the answer in the chain of Hollister stores his company launched three years ago, featuring more moderately priced beach-inspired California-look clothing. The move allows him to capitalize on the popularity of this laid-back style while keeping the status of the Abercrombie & Fitch brand intact.
With their tiki-hut facade and dimly lit interiors, Hollister stores certainly stand out in the mall, and customers seem to be responding. Monthly same-store sales figures routinely show double-digit increases, and the brand has already risen to the No. 5 spot in the Piper Jaffray survey. CEO Jeffries plans to expand the chain rapidly, opening at least 80 stores both this year and next. Ultimately, he thinks the chain could reach 600 to 800 — twice the current number of Abercrombie & Fitch stores.
The company has another chain, called abercrombie, aimed at the 7- to 14-year-old crowd, and is developing a fourth concept. Though Jeffries has been tight-lipped about details, analysts expect that the new chain will target the over-25 set. That would allow customers to grow with the company, from childhood to adulthood.
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