Abercrombie & Fitch Co.

Abercrombie & Fitch Co. (NYSE: ANF) is an omnichannel specialty retailer of apparel and accessories. The Company offers an assortment of apparel, personal care products and accessories for men, women, and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and Abercrombie kid’s brands.

Recent Financial and Business Updates:

• Second Quarter 2023 Performance Overview
  • Net Sales Uplift: The net sales reached a substantial USD 935 million, indicating a noteworthy 16% expansion compared to the previous year. This growth was apparent in both reported figures and constant currency terms.
  • Positive Comparable Sales: The company achieved a commendable 13% increase in the total company comparable sales rate.
  • Enhanced Gross Profit Margin: The gross profit rate exhibited a remarkable elevation to 62.5%, reflecting a significant advancement of nearly 460 basis points from the preceding year. This improvement primarily resulted from a 400 basis points gain due to annual average unit retail (AUR) growth, coupled with a 340-basis points reduction in freight expenses. This enhancement was partly offset by a 180-basis points escalation in costs related to cotton and raw materials, as well as a 60 basis points unfavorable effect stemming from fluctuations in foreign currency.
  • Streamlined Operating Expenses and Efficiency: Operating expenses, excluding other operating income, showed a USD 30 million or 6% increase compared to the preceding year. This escalation was driven by amplified incentive compensation, store occupancy, and technology expenditures. However, the proportion of operating expenses to sales experienced a decline from 58.0% to 53.2% compared to the previous year.
  • Improved Operating Income and Net Income: The reported operating income for this quarter surged to USD 90 million, marking a substantial recovery from an operating loss of USD 2 million in the analogous quarter of the previous year. Furthermore, the operating loss of USD 0 million on an adjusted non-GAAP basis in the prior year was also exceeded. Correspondingly, the net income per diluted share recorded an impressive USD 1.10, standing in stark contrast to the net losses per diluted share of USD 0.33 and USD 0.30 on both reported and adjusted non-GAAP bases respectively, in the preceding year.

• Financial Position and Liquidity
  • Cash and Equivalents: The combined sum of cash and equivalents amounted to USD 617 million, signifying an upswing from USD 518 million and USD 370 million as of January 28, 2023, and July 30, 2022, respectively.
  • Inventories: The inventory value of the company was calculated at USD 493 million, revealing a noteworthy reduction of 30% compared to the inventory value on July 30, 2022.
  • Long-term Gross Borrowings: The company's long-term gross borrowings, linked to its senior secured notes maturing in July 2025 and bearing an annual interest rate of 8.75%, reached a total of USD 300 million.
  • Under the senior-secured asset-based revolving credit facility, the borrowing availability amounted to USD 357 million.
  • Liquidity: The company's overall liquidity, which encompasses the combination of cash and equivalents along with borrowing availability under the ABL Facility, attained an approximate value of USD 974 million. This represented a growth from the liquidity levels of USD 866 million and USD 729 million as of January 28, 2023, and July 30, 2022, respectively.
  • Cash Flow and Capital Allocation: For the year-to-date period ending on July 29, 2023, the cash flow dynamics of the company were as follows: The net cash provided by operating activities amounted to a notable USD 216 million. Net cash utilization for investing activities was tabulated at USD 90 million. Net cash employment for financing activities reached a total of USD 23 million. Additionally, the depreciation and amortization for the year-to-date period ending on July 29, 2023, was assessed at USD 72 million.

• Fiscal 2023 Full Year Projection:
  • Net Sales Expansion: Anticipating a 10% expansion in net sales, the company's projection stands at a progression from USD 3.7 billion in 2022. This revised outlook supersedes the previous forecast of 2% to 4% growth. The recalibrated projection assumes a sustained superior performance of Abercrombie brands over Hollister brands. Additionally, the fiscal year 2023 comprises a 53rd reporting week, contributing an estimated USD 45 million to the overall net sales for both the fourth quarter and the entire fiscal year.
  • Operating Margin Enhancement: The anticipated range for the operating margin is set between 8% and 9%, representing a notable improvement from the prior forecast of 5% to 6%. This advancement owes itself to an anticipated benefit of approximately 250 basis points from enhanced net conditions in terms of freight and raw material expenses. It is complemented by an operational expense leverage due to the anticipated growth in sales. This offset is expected to counterbalance the higher costs incurred due to inflation and increased investments in the 2025 Always Forward Plan initiatives, which include upgrades to the retail merchandising ERP system.
  • Effective Tax Rate Adjustment: The effective tax rate is projected to fall within the low-to-mid 30s, replacing the previous projection of a high-30s rate. This adjustment reflects the persisting challenges in realizing benefits from certain anticipated tax losses outside the U.S., albeit to a lesser degree than initially predicted.
  • Capital Expenditures Forecast: The expected capital expenditures are estimated to be approximately USD 160 million.

Technical Observation (on the daily chart)

The price of ANF stock has shown a consistent upward trend since making its 52-week low on September 01, 2023, with a return of approximately 258.52%. The RSI (14 period) momentum indicator is in an uptrend with currently at an overbought value of 76.25, with expectations of some consolidation or a short-term healthy correction. Moreover, the price is currently positioned above both the 21-day SMA and 50-day SMA trend-following indicators, which may act as dynamic short-term support levels.

As per the above-mentioned price action, key business and financial updates, momentum in the stock over the last month, and technical indicators analysis, a ‘Watch’ rating has been given to Abercrombie & Fitch Co. (NYSE: ANF) at the closing market price of USD 50.16 as of August 25, 2023.

Individuals can evaluate the stock based on the support and resistance levels provided in the report in case of keen interest taking into consideration the risk-reward scenario.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.

Related Risk: This report may be looked at from a high-risk perspective and a recommendation is provided for a short duration. This report is solely based on technical parameters, and the fundamental performance of the stocks has not been considered in the decision-making process. Other factors which could impact the stock prices include market risks, regulatory risks, interest rates risks, currency risks, social and political instability risks etc.

How to Read the Charts?

The Yellow colour line reflects the 21-period simple moving average (SMA) while the blue line indicates the 50- period simple moving average (SMA). SMA helps to identify existing price trends. If the prices are trading above the 21-period and 50-period moving average, then it shows prices are currently trading in a bullish trend.

The Orange colour line in the chart’s lower segment reflects the Relative Strength Index (14-Period) which indicates price momentum and signals momentum in trend. A reading of 70 or above suggests overbought status while a reading of 30 or below suggests an oversold status.

The Red and green colour bars in the chart’s lower segment show the volume of the stock. The volume is the number of shares that changed hands during a given day. Stocks with high volumes are more liquid than stocks with lesser volume as liquidity in stocks helps with easier and faster execution of the order.

The Orange colour lines are the trend lines drawn by connecting two or more price points and used for trend identification purposes. The trend line also acts as a line of support and resistance.

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest. Support 1 refers to the nearby support level for the stock and if the price breaches the level, then Support 2 may act as the crucial support level for the stock.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest. Resistance 1 refers to the nearby resistance level for the stock and if the price surpasses the level, then Resistance 2 may act as the crucial resistance level for the stock.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

The reference date for all price data, currency, technical indicators, support, and resistance levels is August 25, 2023. The reference data in this report has been partly sourced from REFINITIV.

Abbreviations

CMP: Current Market Price

SMA: Simple Moving Average

RSI: Relative Strength Index

USD: United States dollar

Note: Trading decisions require a thorough analysis by individual. Technical reports in general chart out metrics that may be assessed by individuals before any stock evaluation. The above are illustrative analytical factors used for evaluating the stocks; other parameters can be looked at along with additional risks per se. Past performance is neither an indicator nor a guarantee of future performance.

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