Abercrombie & Fitch Is Another Winner In The Fight For Consumer Dollars

Abercrombie & Fitch Is Turning A Corner

The chart of Abercrombie & Fitch (ANF) doesn’t look like a winner, not at first at least, and certainly not until you dig into today’s earnings report. The stock has been trapped in a range for years and the latest leg is down.

Today’s news may have changed that scenario. The company reported 4th quarter earnings that beat expectations and provided optimistic forward guidance. The news had the shares up as much as 8.0% in pre-market trading, they are hovering around 6.30% as I write this and may be confirming a bottom. If so, investors could see as much as 40% upside later in 2020 and that is not counting the dividend.

The Dividend Is What Caught My Eye

As I was researching this story the dividend caught my eye. I wasn’t surprised at the 6.30% yield although it is quite high for a retailer. I ran across similarly high yields on Tuesday when Kohl’s, Target and TJX Companies (KSS) (TGT) (TJX) reported and their payouts are safe. What I was surprised about was the payout ratio and the chance Abercrombie would be cutting its distribution.

At 110% of 2019 earnings, it is well above my comfort range for a stock of any type. A company that pays out in dividends more than it earns is a recipe for disaster. Eventually, the money, if they have it, will run out and when it does I don’t want to be caught holding the bag. After digging deeper, I don’t think this company will cut its dividend this year or next.

Yes, the payout ratio for 2019 is well over 100% but there are mitigating factors. The first is that EPS, both GAAP and Adjusted, was negatively impacted by $0.53 per share due to the company’s exit from certain stores. Adjusting for this fact EPS was more than enough to cover the distribution.

From the Q4 EPS Report

*Both GAAP and non-GAAP results include the adverse impact from flagship store exit charges of approximately $0.53 per diluted share, net of estimated tax effect which is calculated as the difference between the tax provision with and without these charges.

The exit-charges are related to the company’s rationalization strategy, a strategy they have been pursuing for the last two years. The strategy includes a widespread reorganization of operations at the strategic and structural level and those efforts are paying off.

Guidance Is Above Expectations

It’s good that Abercrombie was able to beat consensus because it shows its nationwide rationalization is working. What’s better is that guidance is well above the consensus, mid-single-digits versus low-single-digits, and it looks to me like the company is gaining some traction. Traction means momentum and that means Abercrombie may be raising guidance in the future, beating consensus estimates, and receiving analysts upgrades later this year.

The 4th quarter results were driven by a 1.0% increase in system-wide comps. On a segment basis, Abercrombie branded stores saw same-store sales increase 8%, more than enough to offset a -2.0% decline at Hollister. The Hollister decline is the only area of weakness and even that has a silver lining, comp declines are slowing. Margins also expanded and beat consensus to help juice results. Looking forward, I expect to see margins decline again before the rationalization transformation is complete.=

Fran Horowitz, Chief Executive Officer

"We finished the year on a strong note, with record Black Friday week results contributing to net sales growth and positive comparable sales for the fourth quarter, and for the third consecutive year … Recent results reflect the significant progress we have made against our long-term initiatives, with 2019 marking the second full year of our growing while transforming phase. (We have) reduced gross square footage by 6%, and accelerated the rationalization of our flagship fleet.  We have laid the groundwork, and remain confident in our long-term vision and the global opportunities available to us as we continue to evolve with our customers."

The Technical Outlook: A Possible Bottom Is In-Play

This stock is trading near a long-term low and above my support target. At these levels, with this report and an outlook for growth, I think a reversal is about to happen. The MACD indicator shows momentum consistent with a peak while the market is oversold, a condition that could lead to a rebound if not reversal with price action so close to support. The MACD signal is confirmed by the stochastic which is also showing a bullish crossover.

The risk is that reversal may simply mean the stock returns to its sideways trend. Resistance is currently at the previous low, near $13.65, so there are still sellers present. A move above $13.54 would confirm the trading range of $13.65 to $19.00 so $19.00 would be my next target. In terms of potential gains, $13.65 to $19 is a gain of almost 40% not counting the dividend.