David Einhorn’s Greenlight Capital added 2.1 million shares of Office Depot Inc (NASDAQ:ODP) and 212,500 shares of Abercrombie & Fitch Co. (NYSE:ANF) in the first quarter while also jettisoning some well-known names. With retail seemingly in a better place these days, does either Office Depot stock or ANF stock make sense in your portfolio?
Perhaps, but let’s take a look at both retailers’ situations.
What’s Up With Office Depot Stock?
Office Depot stock is down 33% year to date through May 15. If beaten-down stocks are your forte, ODP should be right up your alley.
David Einhorn can afford to make speculative plays like this because he’s got a $4 billion portfolio invested across 110 Greenlight Capital stocks.
You, on the other hand, might have a big mortgage, a college fund to pay for, or some barely affordable expense that keeps you from assembling a diversified portfolio.
Einhorn’s Office Depot position represents just 1/10 of 1% of Greenlight Capital’s portfolio. I’d hardly say he’s committed to it.
If you’re really interested in following Einhorn’s picks, go with one of his holdings over $250 million; you’ve got five to choose from including Green Brick Partners Inc (NASDAQ:GRBK), a homebuilder in the Texas, Georgia, Colorado and Florida markets.
As for Office Depot stock, its first-quarter sales increased by 6% to $2.8 billion while its adjusted operating income dropped by 37.2% to $93 million. A mixed bag for sure. However, there were some positives in the quarter.
First, free cash flow increased by 193.1% to $170 million. Furthermore, it raised its 2018 free cash flow outlook from $325 million to $350 million. Based on an enterprise value of $2.34 billion, which includes $770 million in non-recourse debt, Office Depot’s got a free cash flow yield of 15.0%. Exclude the non-recourse debt, and it bumps up to 22%.
That’s deep value territory.
What’s Up With ANF Stock?
Abercrombie stock is experiencing a very different year from ODP; it’s up 50% year to date and 94% over the past year. Einhorn’s clearly making a momentum bet with ANF.
The question is whether this momentum continues. With its stock off 9% in the last month, it’s possible the bloom has fallen off the rose.
My InvestorPlace colleague Luke Lango recently had some encouraging words about ANF, which he deemed to have rebranded itself as a winner, not the soulless retailer once known for hiring only models and good-looking people.
“ANF has rattled off a string a positive comparable sales growth quarters in a row, while margins and earnings are improving. Alongside these improved results, ANF stock has taken off from under $10 to over $25,” wrote Lango May 11. “Altogether, Abercrombie & Fitch has successfully ditched the elitist attitude that dragged the company down in the early part of this decade. Now, brand popularity is rebounding, and the stock is soaring.”
I haven’t looked at Abercrombie’s situation for a while so I’ve gone over its latest financials to get a sense of which way the wind is blowing.
Two things jump out at me.
First, same-store sales in both the U.S. and Internationally, were positive in fiscal 2107, up 4% and 1% respectively for 3% comps overall.
That’s the good news. The bad news associated with this kind of number is that Abercrombie was comping on weak 2016 sales. Investors won’t really know if this recovery is real until the second or third quarter when the comps will be harder to beat.
But, on the flip side, a positive number is always preferred to a negative one.
The second thing that I noticed about the fourth quarter is that direct-to-consumer (DTC) sales accounted for 34% of the company’s overall revenue, 300 basis points higher than 2016. Overall, for the entire fiscal 2017, DTC accounted for 28% of overall sales, 200 basis points higher than a year earlier.
Same-store sales and DTC sales are both growing at a decent rate which indicates that its omnichannel business model is working effectively. Customers who buy both online and in-store spend more than customers who buy exclusively using one or the other method, but not both.
That’s excellent news.
The Bottom Line on Office Depot Stock
Should You Buy Office Depot Stock? ANF Stock? Neither or Both? I’m going to go with both, but with a caveat.
Here you’ve got a value play and a momentum play. So, it depends on what type of investor you are. I’m a little of both; I’d best be described as a GARP (growth at a reasonable price) investor.
For me, if I had $5,000 to invest in these two stocks, I’d probably buy $3,500 in ANF with the remainder on ODP.
Einhorn might be on to something.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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