Abercrombie & Fitch Co.

Matt's Fundamental Stock Analysis

Content Disclaimer: I am only a retail investor and I only intend these reports to be used as a guidance. I recommend you do your own research as this will better help you to understand how companies work and operate and what drives their growth. What stocks you decide to purchase, should be chosen by you and this report is made only to display companies which I think are worthwhile to look at and discuss. Just because it is a good company or I like the company does not mean that it will do good in the future. If you want to copy or replace my report, please do so with a link connecting to my blog.

Abercrombie & Fitch Co. (ANF) Company Business Abercrombie & Fitch is a specialty retailer that operates under Abercrombie & Fitch, Abercrombie Kids, Gilly Hicks. Abercrombie & Fitch and Abercrombie kids is the All-American brand for youth and kids respectively. Hollister focuses on the Southern Californian look and brings it to the rest of the world. Finally, Gilly Hicks focuses on clothing for the young women with the same All-American brand but with a influence of Sydney, Australia style. Each retailer has its own styles including music, fragrance and lighting in order to give a spectacular in-store experience. All retailers have standardized design and merchandising presentation in order to open new stores efficiently. Each retailer also operates its own online e-commerce website. Additional Notes: Quarterly dividend of $0.175 per share is pain in March, June, September, and December from fiscal 2008 to fiscal 2010 and expects to continue paying a quarterly dividend Seasonality: Majority of Sales comes from back-to-school season (August) and Christmas Holiday (November and December) Share buybacks: o Fiscal 2008 - ANF repurchased approx. 0.7 million shares amounting to $50 million o Fiscal 2009 - ANF did not repurchase any shares o Fiscal 2010 - ANF repurchased 1.6 million shares amounting to $76.2 million o As of January 29, 2011 ANF has 9.8 million shares available to be repurchased under the 2007 stock repurchase of 10 million share repurchase program ANF relies on excess OCF, which are for the most part generated in the Fall season, to pay for operating expenses and to reinvest in the business for future growth o If needed, ANF has a credit facility if additional funding is needed ANF has stock option compensation programs in place

Income (Loss) From Discontinued Operations RUEHL was in 2008 and 2009 annual statement under Loss from Discontinued Operations

Retailer(Brand) Analysis All retailers had a strong year in fiscal 2010 and Hollister had higher revenues than in 2008 o Gilly Hicks looks very profitable over the past 3 years and looks to have tremendous growth in the future

Net Store Analysis Hollister and Gilly Hicks have seen a net increase of stores for 2009 and 2010 while Abercrombie & Fitch and Abercrombie Kids have seen a net decrease of stores through the same time period

In fiscal 2010, Europe was the best region for same store sales growth while Canada and Japan were the weakest

New Store - Quarterly Analysis International o Q1 - 2 new Hollister stores created o Q2 - 1 Abercrombie & Fitch and 4 Hollister stores created o Q3 - 19 new Hollister stores created o Q4 - 4 Abercrombie & Fitch, 1 Abercrombie Kids, 14 Hollister, 2 Gilly Hicks stores created Domestic o Q1 - N/A

o o o

Q2 - 2 Abercrombie kids and 1 Hollister store closed Q3 - N/A Q4 - 36 Abercrombie & Fitch, 25 Abercrombie kids, and 7 Hollister stores closed

Net Sales - Region Analysis Unites States is still growing, with Europe and Other having a huge amount of growth from fiscal 2009 to fiscal 2010 As the Europe crisis becomes dealt with, Europe sales should take off massively, showing longterm growth in Europe

Past, Current, and Future Outlook Fiscal 2010 Highlights - Exceeded objectives in regards to sales, operating income, and net income per share Originally, their goal was to increase back to their historical peak level of 67%, however due to cost pressures, ANF no longer believe this goal is realistic Same store sales growth of 7% during fiscal 2010, and growth is expected to be the same or greater than this level in both 2011 and 2012 Closed 64 domestic stores in fiscal 2010 and expect to close another 50 in fiscal 2011 International Growth - Fiscal 2011 Expectations o Open up to 40 international mall-based Hollister stores Including their first stores in mainland China and Hong Kong o Open 5 Abercrombie & Fitch flagship stores in Paris, Madrid, Dusseldorf, Brussels, and Singapore o ANF's flagship store in Dublin is now expected to open in 2012 Increase greater efficiency of expenses o Plan to consolidate their two domestic distribution centers Consolidation expected to be completed by mid 2012 Expected to result in reduced operating costs Capital expenditures are expected to amount to $300 million to $350 million in fiscal 2011 Potential Risks: If Gilly Hicks becomes successful it can mean better things from Gap Inc. o If Gilly Hicks is unsuccessful it can have a huge effect on ANF o In fiscal 2009, RUEHL was closed which resulted in pre-tax exit costs of $56.1 million and pre-tax impairment charges of $51.5 million Growth of ANF is largely influenced by their ability to grow internationally

Have closed domestic stores and continue to close underperforming domestic stores in order to increase domestic store productivity o Amounted to 64 domestic store closures amounting to $4.4 million of expenses in fiscal 2010 They currently hedge their foreign exchange risks

Historical Ratio Analysis **If the value is green than the number is believed to be better than the previous number, vice versa if the value is
red

Profitability Ratios
ROE ROA ROIC CROIC

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

28.3% 21.9% 44.7% 13.7%

26.0% 19.6% 39.9% 20.3%

23.5% 17.1% 36.1% 18.8%

32.3% 16.1% 37.2% 11.2%

33.6% 18.7% 41.4% 13.0%

30.0% 18.8% 37.3% 7.5%

29.4% 18.5% 36.0% 10.8%

14.8% 9.6% 18.0% 5.4%

0.0% 0.0% 4.4% 0.7%

7.9% 5.1% 9.3% 7.1%

The return on equity and return on assets have been decreasing throughout the years, although in 2010 the profitability ratios were greatly reduced due to the loss from discontinued of operations of closing RUEHL which amounted to $78.7 million. Looking forward with the strength in the international markets, I believe these ratios will at the very least remain around 2011 levels but should increase although probably not to the historical peak levels.
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Solvency Ratios
Quick Ratio Current Ratio Total Debt/Equity Ratio Long Term Debt/Equity Ratio Short Term Debt/Equity Ratio

1.81 2.48 0.29 0.00 0.00

2.16 2.84 0.33 0.00 0.00

2.08 2.69 0.38 0.00 0.00

1.07 1.58 1.01 0.00 0.00

1.19 1.93 0.80 0.00 0.00

1.30 2.14 0.60 0.00 0.00

1.49 2.10 0.59 0.00 0.00

1.58 2.41 0.54 0.05 0.00

2.06 2.75 0.54 0.04 0.00

1.87 2.56 0.56 0.04 0.00

Debt to equity has been decreased almost in half from 2005 levels with the current and quick ratios showing positive numbers
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Efficiency Ratios
Asset Turnover Cash % of Revenue Receivables % of Revenue SG&A % of Revenue R&D % of Revenue

1.77 12.3% 1.5% 21.0% 0.0%

1.60 24.5% 0.7% 21.5% 0.0%

1.42 29.9% 0.4% 22.6% 0.0%

1.50 17.3% 1.3% 27.8% 0.0%

1.56 1.8% 1.5% 47.2% 0.0%

1.48 2.5% 1.3% 47.0% 0.0%

1.46 3.1% 1.4% 47.5% 0.0%

1.24 14.7% 1.5% 54.5% 0.0%

1.04 23.2% 3.1% 60.8% 0.0%

1.18 23.8% 2.3% 57.4% 0.0%

SG&A as a percentage of revenues has massively increased from early 2000 levels, ANF believes it cannot reach its early 2000 levels as cost pressures have greatly increased since then o They do want to pursue lowering it and around 50-60% seems a good estimate in my opinion
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Liquidity Ratios
Receivables Turnover Days Sales Outstanding Days Payable Outstanding Inventory Turnover Average Age of Inventory (Days) Intangibles % of Book Value Inventory % of Revenue

8.25 5.5 15.2 7.03 51.90 0.0% 8.0%

12.61 2.4 20.7 6.98 52.32 0.0% 9.0%

23.23 1.5 36.1 5.87 62.21 0.0% 10.0%

12.99 4.7 48.3 5.44 67.12 0.0% 10.4%

9.83 5.5 37.5 2.93 124.41 0.0% 13.0%

9.92 4.8 36.9 2.53 144.54 0.0% 12.9%

9.80 5.2 36.2 2.87 127.09 0.0% 8.9%

5.09 5.5 35.5 2.70 135.08 0.0% 10.5%

0.00 11.3 47.1 2.50 146.06 0.0% 10.6%

1.75 8.6 46.6 3.09 118.15 0.0% 11.1%

Relative Ratio Comparison ANF does not classify its direct competitors on their latest's annual statement. However, I believe there competitors to consist of American Eagle Outfitters (AEO), The Gap (GPS), and Aeropostale (ARO).
ANF Stock Price Mkt Cap ($M) EV 52 Wk High 52 Wk Low % off 52Wk Low $ $ $ $ $ 47.75 4,100.00 3,680.00 78.25 40.25 18.6% 21.7 1.0 2.1 9.5 58.3 6.2 1.5% 1.3% 3.1% 30.6% 21.5% 1.0% 4.6% 2.1% 67.5% -15.6% 1.1 2.1 0.01 0.01 62.9% 65.8% 7.8% 13.5% 5.0% 8.6% 6.7% 11.4% 10.6% 17.9% 46.3 2.5 1.3 AEO $ 14.10 $ 2,730.00 $ 2,260.00 $ 16.37 $ 10.00 41.1% 14.8 0.9 2.1 8.4 0.0 5.3 3.1% 2.0% 19.0% 98.8% 10.7% 0.9% 5.0% 59.0% 13.7% -6.5% 1.6 3.0 0.00 0.00 37.4% 42.9% 9.4% 14.8% 6.2% 9.6% 9.8% 14.6% 13.5% 20.2% 74.5 3.9 1.6 $ $ $ $ $ ARO 17.22 1,390.00 1,300.00 26.35 9.16 88.0% 11.8 0.6 3.7 7.3 12.0 4.6 0.0% 0.0% 0.0% 0.0% -1.0% 0.6% 14.8% -52.8% -42.2% 30.2% 0.7 1.8 0.00 0.00 29.9% 35.7% 9.1% 14.6% 5.4% 8.9% 15.8% 26.6% 29.0% 51.0% 0.0 6.6 3.0 GPS $ 22.68 $ 11,070.00 $ 10,790.00 $ 23.73 $ 15.08 50.4% 14.4 0.8 4.0 8.2 19.0 5.6 2.2% 2.1% 7.1% 28.0% -1.9% 0.8% -1.8% -25.7% -16.9% 10.1% 1.3 2.0 0.58 0.60 36.3% 38.0% 9.9% 11.0% 5.7% 6.8% 11.5% 12.9% 24.4% 23.0% 0.0 5.7 2.0

Multiples
P/E(TTM) P/S(TTM) P/Tang BV(MRQ) P/CF P/FCF(TTM) EV/EBITDA(TTM)

Dividends
Div Yld Div Yld - 5yr avg Div 5yr Grth Payout Ratio(TTM)

Growth Rates
Sales(MRQ) v 1yr ago Sales(TTM) v 1yr ago Sales 5yr Grth EPS(MRQ) v 1yr ago EPS(TTM) v 1yr ago EPS 5yr Grth

Balance Sheet
Quick Ratio(MRQ) Current Ratio(MRQ) LTD/Eq(MRQ) Tot D/Eq(MRQ)

Margins
Gross %(TTM) Gross % 5yr Op %(TTM) Op % 5yr avg Net %(TTM) Net % 5yr avg

Returns
ROA(TTM) ROA 5yr avg ROE(TTM) ROE 5yr avg

Efficiency
Rec Turnover(TTM) Inv Turnover(TTM) Asset Turnover(TTM)

On a relative basis, ANF looks more expensive than its competitors in relation to the multiples It offers a 1.5% dividend yield which is below that of both AEO and GPS The 5 year growth rates are considerably below that of ARO and GPS while the yearly growth is massively higher than ARO and GPS Gross margins are on the higher end while the operating margins are on the lower end signaling that management is not able to control its costs and expenses as well as its competitors ROA and ROE both long-term and short-term are well below their competitors Overall, on a relative basis ANF does not look as attractive as its competitors

Investment Valuations Reverse DCF Starting with a reverse DCF valuation, I will assume a discount rate of 12% and a terminal growth rate of 1.5%. (The terminal growth rate of any company should never be higher than the growth rate of the economy.) A reverse DCF valuation should be used just to see a rough picture of where the market has currently priced ANF based on fundamentals. Based on my assumptions the market has currently priced The Gap to have a owners earnings FCF growth rate of around a MASSIVE 20% - 30% year after year for the next 10 years (range given due to difference in 2011 owners earnings and TTM owners earnings), where then it will grow at its terminal growth rate. This is a rough estimate number, however this is well below its 5 year and 10 year historical averages. FCF growth is best to be looked at over multi-year periods as it is very volatile on a year to year basis. Actual Owners Earnings DCF This is the heart of my valuation of a company. I believe that a more reasonable estimate of around 13% growth for the next 10 years with it slowing down in the later years is more accurate. I have also adjusted the owners earnings FCF as the trailing twelve months amount has decreased significantly from the 2011 annual statement and I have adjusted it with an decrease towards historical average. Under my assumptions, I believe the intrinsic value to be around $28.31 on the safe side and on the more optimistic side with increasing growth it can be up to $38.61. On a side note, I took into consideration that the 2010 net income of only $0.3 million was due primarily from the $79 million closure costs of RUEHL.

Note, it says buy under $14.16 this is not a strict rule it is just the price which generated a margin of safety of 50%. Consider the fact that there is a high probability around 95% that ANF will never be under $14.16 or not for the next 5 years With that being said, a shorting strategy seems to be where I am focused right now (shorting will be discussed further)

90 80 70 60 50

5 Yr Price vs Intrinsic Value

40 30
20 10 0 13/06/2005 13/06/2007
Historical Price

13/06/2009
Intrinsic Value

13/06/2011
Buy Price

The above image is with a 50% margin.

90 80 70 60 50 40 30 20 10 0 13/06/2005

5 Yr Price vs Intrinsic Value

13/06/2007
Historical Price

13/06/2009
Intrinsic Value

13/06/2011
Buy Price

The above image is with a 25% margin. Note: The reason that the intrinsic value goes to 0 in 2008-2009 is because past intrinsic values are based off of historical growth rates which I cannot adjust and at the point of time the average owners earnings FCF multi-year growth was negative

FCFE Valuation Under the FCFE valuation I consider ANF to be also overvalued. The growth rate for this model is built around fundamentals, where it is equal to the non-cash return on equity multiplied by the equity reinvestment rate which gives us a net income growth rate of 23.40%. Reason being that we do not want to just guess a growth rate and it is better to get one from fundamentals, obviously the option to adjust these ratios can occur if needed. According to this model, the intrinsic value is roughly around $39.66, which is in line with our actual owner's earnings DCF. Technical Analysis My reports are strongly on the fundamental side but I have studied technical analysis in the past and I think it is good to just briefly bring it up. Looking at the chart below, it is obvious that the stock has found a resistance point at around the $75.00 - $77.00 level. There has also been a pivot point which has turned into support at around the $34 level.

Overview I believe that ANF has a large opportunity for growth in the future assuming that Europe is able to recover and Gilly Hicks achieves at least mediocre success. However, I am not confident with their relative ratio's and I also believe the stock will not become cheap enough for me to want to purchase it. If it did, I would re-evaluate my analysis on them, but on the mean time I am more focused on going short. At the current price I am not interested in shorting the stock as I believe it is too risky of a position for me. However, if it reaches over the $70 level I would consider purchasing put options as I believe $70 level would be massively overbought on a fundamental basis. I would purchase the option with the longest maturity, the cheapest one with the strike price being higher than $40. I would consider exercising the put options once the price hits below $40. The reason for purchasing put options instead of shares is because your loss for shorting shares is unlimited while with purchasing put options your loss is limited to your investment amount and you do not have to cover dividends as you would if you simply shorted the stock. Options are risky, be aware. Best Regards, Matthew

Matt's Fundamental Stock Analysis

Content Disclaimer: I am only a retail investor and I only intend these reports to be used as a guidance. I recommend you do your own research as this will better help you to understand how companies work and operate and what drives their growth. What stocks you decide to purchase, should be chosen by you and this report is made only to display companies which I think are worthwhile to look at and discuss. Just because it is a good company or I like the company does not mean that it will do good in the future. If you want to copy or replace my report, please do so with a link connecting to my blog.