Consistent with its  “every day should feel as exceptional as the start of a long weekend” credence, Abercrombie & Fitch Co. (NYSE: ANF) opened a new store on famed 5th Avenue on Friday. The lavish, multilevel location echoes not only the glitz of New York City but also how far the clothing retailer has come over the past year. 

After its core teen customers bought significantly less in 2022, ANF turned to new audiences to strengthen sales and reduce its teen dependency. The Abercrombie brand has been retooled to cater to young adults in their 20’s, 30’s and even 40’s. A broadened ANF wardrobe also includes apparel and accessories for the office worker and for ‘special occasions.’

In conjunction with the pivot, management has been working hard to lower costs, reduce inventories and bolster the company’s digital offerings. The result: a return to top-line growth in the last two quarters — punctuated by a shockingly good profit in Q1 that caused ANF shares to gap up in eight times normal volume. 

The stock has trended higher since and is trading near its 52-week high of $38.21. Heading into next month’s Q2 earnings release, though, is this momentum play still worth trying on? 

Will Abercrombie & Fitch Top Q2 Estimates?

Wall Street is projecting another profitable quarter driven by improving demand and markets — but plenty of hurdles could get in the way. High prices and interest rates may have led to cautious clothes spending, especially absent a major shopping season like back-to-school.

The extent to which ANF’s newfound adult customer base spent on summer outfits could make or break the quarter. The consensus forecast of 4% revenue growth is far from a lock considering the company missed Q2 estimates badly last year.

Yet with the stock having more than doubled since then, shareholders are hoping Abercrombie & Fitch is a different company this time around. A move into new consumer segments has undoubtedly expanded the company’s total addressable market (TAM).

Improved digital capabilities through ANF’s websites and apps should also be supportive of sales growth. The company seems more clearly defined with its Hollister brands (including Gilly Hicks and Social Tourist) focused on the teen market, Abercrombie targeting adults and Abercrombie Kids all about kids.

The business is well-balanced too, with Abercrombie and Hollister each accounting for roughly half of total revenue. Weakness in one could be offset by strength in the other.

Analysts are expecting Q2 earnings per share (EPS) of $0.13, which would mark a huge turnaround from the $0.30 per share net loss a year ago. Along with lower freight costs and inventories, ANF will certainly have more levers to pull en route to another potential positive surprise.

Is ANF Stock Undervalued or Overvalued?

Based on the Street’s projection for 2023 EPS, Abercrombie & Fitch shares are trading at 17.5x earnings. This is below the midpoint of the stock’s five-year P/E range of 9x to 32x. A reversion to the historical midpoint would add 17% to ANF’s share price. 

Looking ahead to 2024 EPS, the stock looks even more attractive at 15x. Small cap apparel retail peers Zumiez (28x) and Revolve Group (25x) are trading at much higher multiples. Mid-cap peer Boot Barn is slightly more expensive at 16x, while American Eagle (12x) and Urban Outfitters (11x) are cheaper.

Although ANF looks undervalued strictly from a P/E ratio perspective, Wall Street is clearly a house divided. Last week, Jeffries reiterated its Buy rating, saying the company is on track to meet its long-term operating margin goals. The analyst offered a Street-high $43.00 price target which implies a 15% upside over the next 12 months.

This is a sharp contrast to the Sell rating that Morgan Stanley issued last month, along with a $18.00 target that suggests at least 50% downside. 

Overall, the average target calls for the stock to head back to around $30.00 over time. However, the Street has been playing catch up as ANF’s financial performances have improved.

A better-than-expected Q2 report could easily push ANF’s share price into the $40’s (if it doesn’t get there prior). Expectations will be higher than usual, though, so a disappointment could ignite a move back to the $20’s.