A&F: A "Classic Value" Stock

04/23/2004 12:00 am EST

Focus:

John Dessauer

President, John Dessauer Investments, Inc.

While some may know Abercrombie & Fitch for its controversial holiday catalog, John Dessauer, editor of Investor's World, sees the retailer as a classic value situation and has made the stock his latest new buy recommendation. Here’s his review.

"Abercrombie and Fitch (ANF NYSE) is an upscale retailer, a category that suffers during recessions, but benefits during times of economic growth. Customers don’t go to A&F for discounts. Instead, the firm has something that other retailers would like to have—pricing power. Now that the economic outlook is improving, management will add more lines of luxury goods at higher prices. As a result, profit margins are expected to widen in 2004. A&F also owns a brand called Hollister, for apparel and merchandise targeted to he teenage market. There also is Abercrombie Kids, a chain that focuses on younger children, and they will be adding another retail concept later this year, one that will focus on older men.

"A&F is a classic value stock, with uninterrupted earnings growth since its spinout from The Limited in 1996. Over that period, earnings per share have grown from $0.27 to last year’s $2.06. I see that as an enviable long-term record. The balance sheet is super-strong, with no long-term debt at all. And the company had $500 million in cash at year-end 2003. Free cash flow is also strong, and the company has been aggressively buying back stock—1.6 million shares in last year’s fourth quarter. Why, you might ask, is the stock selling at 13.4 times last year’s earnings, when the retail group sells at 21 times trailing earnings?

"Wall Street doesn’t like this company because of lackluster same-store sales growth and sub-par earnings growth in 2003. Earnings were up only 6% in 2003 over 2002. The result is a stock trading at less than 15 times earnings and a management determined to get growth going and the stock price up. Starting last month, Abercrombie is paying a dividend, $0.125 per share per quarter for a yield of 1.7%. Given its low price and the company’s outstanding record and strong finances, there is very little risk here. Any sign of improvement in same-store sales, will boost this stock. We think A&F has the potential of rising to $45 to $50 in 12 months."

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