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Here Are Reasons Why Abercrombie & Fitch Is a Hot Investment Pick

Zacks Equity Research

Abercrombie & Fitch Co. ANF appears to be a solid bet, given the company’s sturdy efforts to remain on growth trajectory. We expect the company to continue gaining from its capital investments, cost-saving efforts, and loyalty and marketing programs.

Driven by these positives, shares of this New Albany, OH-based company have increased approximately 41% in the past six months, against the industry’s decline of 13.5%.


 

Let’s delve deeper into the major factors, which have been driving this Zacks Rank #1 (Strong Buy) stock, which also flaunts a VGM score of A.

Digital & Omni-Channel Efforts Bodes Well

Abercrombie is making significant progress in expanding digital and omni-channel capabilities. The company’s investments in mobile, omni-channel and fulfillment have significantly aided the growth of its digital business. Digital engagement with consumers has been its core strength. The digital business continued to perform well, backed by robust momentum across both brands and geographies.

Digital channel sales surged 36% in the fiscal fourth quarter, while reaching a key milestone of crossing the $1 billion mark in annual sales in fiscal 2018. Further, the company is progressing well on its goal of delivering integrated digital and in-store shopping experiences. Its ‘purchase online, pick up in store’ (POPinS), and ‘order in-store’ capabilities are delivering strong results.

Hollister: Key Catalyst

Abercrombie is aggressively expanding Hollister stores in the new markets. The idea behind this is that its smaller size of operation makes it cheaper and less capital intensive compared with the company’s namesake brand. Growth of the Hollister brand internationally could enhance the company’s overall performance.

This brand reflects persistent positive momentum driven by strong sales growth across all channels and geographies in fourth-quarter fiscal 2018. In the fiscal fourth quarter, comps for the brand improved 6%, marking the brand’s ninth straight quarterly growth. Impressively, Hollister is gaining from the positive customer response to product innovations, emerging categories and overall customer experience.

Store Fleet Optimization on Track

Abercrombie has been closely working on its goal of optimizing store fleet, which has led to significant store closures in the past eight years. However, it takes these closures as an opportunity to improve store productivity by reducing store occupancy costs. Consequently, the company has closed about 29 stores in fiscal 2018, reducing total square footage by 2%. This aided a low-single-digit improvement in productivity per square foot from the fiscal 2017 level.

For the next two years, the company has identified lease expirations for nearly 50% of its store base in the United States. Simultaneously, it expects to continue investments in enhancing store experiences mainly through new store prototypes, remodeled stores and right-sizes. In fiscal 2019, it plans to deliver about 85 new experiences, up from 67 new experiences delivered in fiscal 2018.

Wrapping Up

Abercrombie expects sturdy operating expense leverage witnessed in fiscal 2018 to continue in fiscal 2019. Consequently, it anticipates robust top-line growth, gross margin expansion and operating expense leverage, which should drive operating margin expansion in fiscal 2019.

The company estimates sales to increase 2-4% in fiscal 2019, driven by low-single-digit comparable store sales growth and contribution from new stores. Gross margin is likely to improve slightly from 60.2% recorded in fiscal 2018. Driven by these, the company believes that it is on track to deliver on its previously stated adjusted operating margin expansion target for fiscal 2020.

We expect all the aforementioned factors to continue bolstering the company’s performance, and help it remain in investors’ good books.

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