Abercrombie & Fitch (ANF) shareholders have gone through a wild ride. The share price (currently below $15) plummeted even more following Q2 2019 earnings, and is now more than 50% below April levels ($30+). ANF owns strong and iconic brands, namely Hollister, Abercrombie & Fitch, Abercrombie Kids and Gilly Hicks. Hollister is doing the heavy lifting. This article outlines 3 key positives that support the long ANF thesis.
1. With the exception of FY 2016, ANF’s operating cash flow has been quite stable over the past 5 years
|(in thousands)||Net Cash Provided by Operating Activities||CAPEX||Free Cash Flow|
FY 2019 outlook for CAPEX is approx $200M, of which around $120M relates to stores and $80M for other initiatives such omnichannel purposes. Retail is a volatile sector, but I expect ANF to continue generating adequate operating cash flow to support all corporate priorities including CAPEX (both maintenance and growth), the dividend and share repurchases.
ANF repurchased over 3.5 million shares in Q2 2019. I expect further repurchases going forward. At end of Q2 2019, the company had approximately 5 million shares remaining available for purchase under its existing program. If the share price remains depressed, I expect the company to accelerate its existing share repurchase program and announce a new one. A substantially lower share count is beneficial as it significantly improves future per share metrics. It also reduces the cost, in absolute terms, to maintain the existing dividend on a per share basis (i.e. same dividend per share distributed to a smaller amount of shares outstanding).
Source: ANF Q2 2019 presentation, slide 17
For FY 2018, ANF repurchased approximately 2.9 million shares at an average price of $23.42, for a total consideration of approximately $69M. YTD 2019, ANF repurchased approximately 3.5 million shares at an average price of $16.31, for a total consideration of approximately $58M.
The lower the share price, the more effective buybacks are. This is a recipe for success, provided that the earnings power/operating cash flow of the company remains strong, or at least close to current levels. Given the company’s strong brands and ambitions for growth globally and plans to take additional market share in the US, I would not be surprised if ANF manages to grow operating cash flow at a decent pace in the years to come.
3. Strong balance sheet, low debt
ANF has low debt. As of August 3 2019, ANF’s cash balance was c.$499M, more than long term debt of c.$251M. This provides a safety cushion. Compare this to L Brand, for example, which has cash of c.$1.15bn versus long term debt of c.$5.7bn.
In addition, ANF’s total current assets were c.$1.2bn versus total current liabilities of c.$790M. Due to new accounting standards, there is a new liability on the balance sheet of $1.2bn relating to operating leases, something not registered in previous years. This is causing negative reaction by the market, such as in the case of Dave & Buster’s (PLAY). However, not all debts are the same. If you add operating lease liabilities to debt calculations, many companies appear more indebted than they really are.
We take comfort in the 3 positives discussed above and are buyers of ANF below $15/share. For fiscal year 2020, the company is guiding low single-digit sales CAGR from positive comparable sales and global market expansion, modest gross profit rate expansion and operating expense leverage. If the 2020 projections play out and the company experiences a further boost in net cash provided by operating activities, coupled with a lower share count, the impact on operating cash flow per share could be significant, leading to a large rally. That said, there is a lot of pessimism around retail at the moment. In particular, many apparel retailers are trading at or close to all time lows, and the market expects more pain. Also, tariffs don’t help.
Disclosure: I am/we are long ANF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.