My Top Value Stock This Week: Abercrombie & Fitch

Abercrombie & Fitch Company (ANF) is a specialty retailer that sells casual clothing, personal-care products, and accessories for men, women, and children. It sells directly to consumers through its stores and websites, including the Abercrombie & Fitch, Abercrombie kids, and Hollister brands.

Its product portfolio includes knit and woven shirts, graphic T-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, and personal care products and accessories for men. The company also sells innerwear, sleepwear, and at-home products for girls through direct-to-consumer operations and Hollister stores under the Gilly Hicks brand.

Over the last couple of years, the company has been adapting to the changing retail landscape. As foot traffic was slowing in their retail stores, the company has been growing its digital sales. The pandemic made that a priority.

The company has made a lot of progress in expanding its digital and omnichannel capabilities. This has helped the company better engage with its consumers and has led to strong digital momentum in the first quarter. Digital net sales increased 45% year over year while contributing 52% of the company's total sales.

In fact, ANF's digital business is benefiting from the addition of new customers and strong digital marketing efforts. Management remains encouraged with its strong online presence and expects to keep gaining from this platform. The company plans to continue investing in its digital capabilities by adding curbside and ship from store services.

In addition to expanding its digital platform, the company has also reduced its global store square footage. As part of its store optimization plans, ANF has repositioned larger format flagship locations into smaller omnichannel enabled stores. Last year, the company closed eight European flagship locations, and in the first quarter, it closed the Orchard Road Singapore flagship store.

In addition, the company closed seven non-flagship stores in the fiscal first quarter. This repositions the business away from the large, foot traffic-driven stores to a more customer-focused omnichannel format.

ANF's sales have also been aided by high customer retention and higher spend per customer. Plus, management is looking to optimize capacity at its distribution centers to meet the increased digital demand. Its second-quarter earnings are expected on August 26th, where sales are expected to soar 25.3% year over year, and earnings are forecasted to pop a whopping 221.7%. 

As the company targets a younger audience, it should also benefit from its recent social media partnership with Charli & Dixie D'Amelio, the "Social Tourists." This is a new brand that was launched last month for ANF's Hollister segment. Charli & Dixie are sisters, with a combined 250M followers on social media, including TikTok.

Plus, the brand is expected to be featured in the D'Amelio family's new series, The D'Amelio Show, on Hulu. ANF has an overall grade of B, translating into a Buy rating in our POWR Ratings system. The company has a Value Grade of B, which isn't surprising with a trailing P/E of 13.29 and a forward P/E of 12.63. In fact, the company has one of the best valuations in the industry.

The stock is also underpriced by as much as 71.2% based on analyst price targets. ANF also has a Quality Grade of A due to a rock-solid balance sheet. While the company only had $909 million in cash as of the end of the most recent quarter, it had no short-term debt. We also provide Growth, Momentum, Stability, and Sentiment Grades for ANF, which you can find here.

ANF is ranked #22 in the Fashion & Luxury industry. From a valuation standpoint, the company is a standout in the industry. If we consider a larger and more popular company right now, lululemon athletica inc. (LULU), ANF is the better stock. LULU's overall grade is a C, a Neutral rating in our POWR Ratings system, compared to ANF's Buy rating.

LULU's Value Grade of D is also problematic. The stock has a trailing P/E of 73.56, which indicates how overvalued it is and how much better ANF looks with a trailing P/E of 13.29. ANF also looks favorable when compared to another Generation Z favorite, V.F. Corporation (VFC). VFC, which is well known for its Vans shoes, is only rated Neutral in our POWR Ratings system.

VFC also has a Value Grade of D, with a price-to-free-cash flow ratio of 27.3, which is not only higher than the industry average of 15.2 but well above ANF's 6.9. So, once again, ANF is the better pick. But if you're interested in more top-ranked stocks in this industry, click here. 

Abercrombie & Fitch Company is just one of the stocks in my POWR Value portfolio. That's where I combine my many years of investing experience with the Top 10 Value Stocks strategy, which has +38.63% annual returns, to bring investors the best value stocks for today's market. 

If you would like to see the current portfolio of 14 stocks, and be alerted to our next timely trades, then consider starting a 30-day trial by clicking the link below.

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ANF shares were trading at $37.79 per share on Friday afternoon, up $0.33 (+0.88%). Year-to-date, ANF has gained 85.61%, versus a 19.40% rise in the benchmark S&P 500 index during the same period.

David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

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