Is Abercrombie Too Promotional?

With shares of Abercrombie & Fitch Co. (NYSE:ANF) trading at around $45.94, is ANF an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Determining future potential for Abercrombie isn’t easy. There are many positive and negative factors at the moment. It essentially comes down to whether or not a decreased promotional approach will be effective. If so, Abercrombie could be off to the races. If not, and you see more promotions and sale offers in store windows, then Abercrombie will tread water at best. Abercrombie isn’t going to give up on promotions. Rather, it will use more targeted promotions based on user data.

Abercrombie is currently focused on improving cash flows and maintaining a healthy balance sheet. Expense control has been tight, which should be looked at as a positive in this unpredictable retail environment. However, Abercrombie is looking to expand in Asia and the Middle East, which can be looked at as a positive or a negative. That hinges on the future status of the global economy.

There are several negatives for this story as well. One of those negatives is that loyal customers have come to expect sales. If a customer arrives at the store with the mindset of spending X amount of dollars, and the product they were interested in costs more than they had anticipated, then they’re either going to pass on making the purchase or they will make the purchase with frustration. Neither is a good outcome. Another negative is high expectations. Abercrombie expects EPS growth of 4 percent to 7 percent. Possible? Yes. Setting the bar high? Yes. A final negative is that comparable store sales have been weak.

There are more positives and negatives for Abercrombie, but they will be covered in the Trends section. For now, let’s look at some basic fundamentals and compare them to basic fundamentals for American Eagle Outfitters (NYSE:AEO) and Gap Inc. (NYSE:GPS). Abercrombie and American Eagle are similar in size. Abercrombie has a market cap of $3.67 billion, and American Eagle has a market cap of $3.71 billion. Gap is a much larger company with a market cap of $16.79 billion.

Abercrombie looks good in many areas. However, it should be noted that there’s a 7.40 percent short position on the stock. Therefore, there are more than a few non-believers out there. Let’s take a look at some more important numbers.