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Is Abercrombie's High P/S Ratio a Growth Indicator or Warning Sign?
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Abercrombie & Fitch Company (ANF - Free Report) is well-known for its high-growth trajectory. However, its current forward 12-month price-to-sales (P/S) multiple of 1.4X raises concerns about whether the stock's valuation is justified. This multiple is significantly higher than the Zacks Retail - Apparel and Shoes industry average of 1.06X, making the stock seem relatively expensive.
At 1.4X P/S, Abercrombie, which is a leading name in the retail apparel industry, is trading at a valuation much higher than its competitors. Its competitors, such as American Eagle Outfitters, Inc. (AEO - Free Report) , The Gap, Inc. (GAP - Free Report) and Urban Outfitters Inc. (URBN - Free Report) , are delivering solid growth and trade at more reasonable multiples. AEO, GAP and URBN have forward 12-month P/S ratios of 0.66X, 0.54X and 19.54X — all significantly lower than Abercrombie. At such levels, ANF’s valuation seems out of step with its growth trajectory, especially given the recent slowdown in its stock price growth rate.
Image Source: Zacks Investment Research
The stock's elevated valuation reflects high investor expectations for growth. However, compared with the above-mentioned competitors, Abercrombie looks increasingly vulnerable in an environment wherein market participants are growing cautious about overpriced retail stocks. ANF’s ability to meet or exceed these lofty expectations is crucial in justifying its premium pricing.
Slowdown in Sales Raises Alarm for Abercrombie
One of the key reasons for Abercrombie’s struggles is its slowing net sales growth. For second-quarter fiscal 2024, ANF posted 21% year-over-year net sales growth, marking a slight slowdown from 22% growth in first-quarter fiscal 2024.
Moreover, the company’s fiscal 2024 shows a further slowdown in sales growth. The company projects 12-13% year-over-year sales growth for fiscal 2024, indicating a deceleration in the second half of fiscal 2024. At the mid-point of 12.5%, this forecast suggests notable declines from 22% and 21% growth achieved in the first and second quarters, respectively, and it is also below the 16% rise seen in fiscal 2023.
Management pointed out in the earnings call that fiscal 2024 is one week shorter than fiscal 2023, which is expected to reduce fourth-quarter sales by $80 million, or 5.5 percentage points, and affect full-year sales by $50 million, or 1.2 percentage points.
The slowing sales momentum is likely to compress margins, with Abercrombie guiding for a fiscal 2024 operating margin of 14.5% at the mid-point. This also raises concerns about economic uncertainties and the sustainability of the company’s recent profit gains. This forecast indicates a decline of 100 basis points from the 15.5% margin reported in the second quarter of fiscal 2024.
For a company trading at such a premium valuation, this deceleration in growth is troubling. It signals that Abercrombie may be transitioning out of its high-growth phase, and its current valuation might not be sustainable unless growth accelerates again.
ANF Stock Follows Suit, Reflects a Slowdown
Given the recent sentiment about the sustainability of Abercrombie’s sales, its shares have also witnessed a remarkable slowdown. After experiencing solid growth rates in the first half of 2024, shares of Abercrombie have improved just 4.4% in the past three months, marking an underperformance from the broader industry’s 6.6% rise. The stock also underperformed the Retail-Wholesale sector’s growth of 16.5% and the S&P 500’s rally of 9.9% in the same period.
ANF’s Three-Month Stock Return
Image Source: Zacks Investment Research
At the current price of $137.35, the ANF stock trades at a discount of 30.3% to its 52-week high of $196.99. The current stock price reflects a 110.2% premium from its 52-week low mark. ANF trades below its 50 and 200-day moving averages, indicating a bearish sentiment.
Despite the company’s lower-than-anticipated guidance, estimates for Abercrombie have shown an uptrend in the past 60 days. The Zacks Consensus Estimate for ANF’s fiscal 2024 and 2025 earnings per share rose 1.5% and 2%, respectively, in the last 60 days. The upward revision in earnings estimates indicates that analysts have faith in the company’s growth potential.
Image Source: Zacks Investment Research
For fiscal 2024, the Zacks Consensus Estimate for ANF’s sales and EPS implies 13% and 63.4% year-over-year growth, respectively. The consensus mark for fiscal 2025 sales and earnings indicates 5% and 1.1% year-over-year growth, respectively.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Despite its slowing growth rates, Abercrombie’s long-term prospects are intact. The company continues to benefit from robust brand performance, driven by its commitment to providing high-quality, on-trend assortments for new and loyal customers across various regions and brands. Management’s emphasis on product quality and innovation has played the trick for Abercrombie.
The company has also been investing in stores, digital initiatives and technology, which are slated to enhance its long-term strength. Its ability to capitalize on favorable fashion industry trends and robust strategies, including store-optimization plans, has driven store traffic.
As part of its store optimization plans, Abercrombie has modernized its stores, creating inviting and comfortable environments that encourage shoppers to linger and explore. The company has also invested in seamless e-commerce platforms that provide personalized recommendations, easy navigation and hassle-free returns. With this, it is on track to reposition the larger-format flagship locations to smaller omni-channel-enabled stores.
Abercrombie's strategic transformation has positioned it for sustainable, profitable growth in the long term. As it continues to innovate and respond to market trends, the company is well-equipped to sustain its upward momentum and deliver value to shareholders.
Is the Slowdown in ANF Stock a Buy Opportunity?
Abercrombie’s premium valuation and slowing growth rates raise valid concerns for investors. Though the company's sales guidance is somewhat disappointing, it could simply mean a natural slowdown following exceptional growth driven by its revival efforts and positive customer response in the prior year period. Moreover, the stock’s overvalued stature can be linked to the company's long-term growth potential, supported by its transformation strategies, financial resilience and operational acumen.
Also, the recent pullback in the ANF stock offers a compelling buying opportunity for investors looking to participate in the retailer’s promising long-term growth. Abercrombie currently has a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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Is Abercrombie's High P/S Ratio a Growth Indicator or Warning Sign?
Abercrombie & Fitch Company (ANF - Free Report) is well-known for its high-growth trajectory. However, its current forward 12-month price-to-sales (P/S) multiple of 1.4X raises concerns about whether the stock's valuation is justified. This multiple is significantly higher than the Zacks Retail - Apparel and Shoes industry average of 1.06X, making the stock seem relatively expensive.
At 1.4X P/S, Abercrombie, which is a leading name in the retail apparel industry, is trading at a valuation much higher than its competitors. Its competitors, such as American Eagle Outfitters, Inc. (AEO - Free Report) , The Gap, Inc. (GAP - Free Report) and Urban Outfitters Inc. (URBN - Free Report) , are delivering solid growth and trade at more reasonable multiples. AEO, GAP and URBN have forward 12-month P/S ratios of 0.66X, 0.54X and 19.54X — all significantly lower than Abercrombie. At such levels, ANF’s valuation seems out of step with its growth trajectory, especially given the recent slowdown in its stock price growth rate.
Image Source: Zacks Investment Research
The stock's elevated valuation reflects high investor expectations for growth. However, compared with the above-mentioned competitors, Abercrombie looks increasingly vulnerable in an environment wherein market participants are growing cautious about overpriced retail stocks. ANF’s ability to meet or exceed these lofty expectations is crucial in justifying its premium pricing.
Slowdown in Sales Raises Alarm for Abercrombie
One of the key reasons for Abercrombie’s struggles is its slowing net sales growth. For second-quarter fiscal 2024, ANF posted 21% year-over-year net sales growth, marking a slight slowdown from 22% growth in first-quarter fiscal 2024.
Moreover, the company’s fiscal 2024 shows a further slowdown in sales growth. The company projects 12-13% year-over-year sales growth for fiscal 2024, indicating a deceleration in the second half of fiscal 2024. At the mid-point of 12.5%, this forecast suggests notable declines from 22% and 21% growth achieved in the first and second quarters, respectively, and it is also below the 16% rise seen in fiscal 2023.
Management pointed out in the earnings call that fiscal 2024 is one week shorter than fiscal 2023, which is expected to reduce fourth-quarter sales by $80 million, or 5.5 percentage points, and affect full-year sales by $50 million, or 1.2 percentage points.
The slowing sales momentum is likely to compress margins, with Abercrombie guiding for a fiscal 2024 operating margin of 14.5% at the mid-point. This also raises concerns about economic uncertainties and the sustainability of the company’s recent profit gains. This forecast indicates a decline of 100 basis points from the 15.5% margin reported in the second quarter of fiscal 2024.
For a company trading at such a premium valuation, this deceleration in growth is troubling. It signals that Abercrombie may be transitioning out of its high-growth phase, and its current valuation might not be sustainable unless growth accelerates again.
ANF Stock Follows Suit, Reflects a Slowdown
Given the recent sentiment about the sustainability of Abercrombie’s sales, its shares have also witnessed a remarkable slowdown. After experiencing solid growth rates in the first half of 2024, shares of Abercrombie have improved just 4.4% in the past three months, marking an underperformance from the broader industry’s 6.6% rise. The stock also underperformed the Retail-Wholesale sector’s growth of 16.5% and the S&P 500’s rally of 9.9% in the same period.
ANF’s Three-Month Stock Return
Image Source: Zacks Investment Research
At the current price of $137.35, the ANF stock trades at a discount of 30.3% to its 52-week high of $196.99. The current stock price reflects a 110.2% premium from its 52-week low mark. ANF trades below its 50 and 200-day moving averages, indicating a bearish sentiment.
Abercrombie Stock Trades Below 50-Day & 200-Day Moving Averages
Image Source: Zacks Investment Research
ANF’s Estimates Portray Strength
Despite the company’s lower-than-anticipated guidance, estimates for Abercrombie have shown an uptrend in the past 60 days. The Zacks Consensus Estimate for ANF’s fiscal 2024 and 2025 earnings per share rose 1.5% and 2%, respectively, in the last 60 days. The upward revision in earnings estimates indicates that analysts have faith in the company’s growth potential.
Image Source: Zacks Investment Research
For fiscal 2024, the Zacks Consensus Estimate for ANF’s sales and EPS implies 13% and 63.4% year-over-year growth, respectively. The consensus mark for fiscal 2025 sales and earnings indicates 5% and 1.1% year-over-year growth, respectively.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Analyzing ANF's Core Strengths & Long-Term Growth Potential
Despite its slowing growth rates, Abercrombie’s long-term prospects are intact. The company continues to benefit from robust brand performance, driven by its commitment to providing high-quality, on-trend assortments for new and loyal customers across various regions and brands. Management’s emphasis on product quality and innovation has played the trick for Abercrombie.
The company has also been investing in stores, digital initiatives and technology, which are slated to enhance its long-term strength. Its ability to capitalize on favorable fashion industry trends and robust strategies, including store-optimization plans, has driven store traffic.
As part of its store optimization plans, Abercrombie has modernized its stores, creating inviting and comfortable environments that encourage shoppers to linger and explore. The company has also invested in seamless e-commerce platforms that provide personalized recommendations, easy navigation and hassle-free returns. With this, it is on track to reposition the larger-format flagship locations to smaller omni-channel-enabled stores.
Abercrombie's strategic transformation has positioned it for sustainable, profitable growth in the long term. As it continues to innovate and respond to market trends, the company is well-equipped to sustain its upward momentum and deliver value to shareholders.
Is the Slowdown in ANF Stock a Buy Opportunity?
Abercrombie’s premium valuation and slowing growth rates raise valid concerns for investors. Though the company's sales guidance is somewhat disappointing, it could simply mean a natural slowdown following exceptional growth driven by its revival efforts and positive customer response in the prior year period. Moreover, the stock’s overvalued stature can be linked to the company's long-term growth potential, supported by its transformation strategies, financial resilience and operational acumen.
Also, the recent pullback in the ANF stock offers a compelling buying opportunity for investors looking to participate in the retailer’s promising long-term growth. Abercrombie currently has a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.