ANFBuy

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Pitch for:

Abercrombie & Fitch Co.(ANF)

By the Consumer Goods Sector group:

Ryan Sepassi, Ben Enowitz,Danielle Kolin, and Victoria Woods

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ANF Summary

Sells fashionable clothing and accessories to a

customer base age 14-30yrs

Abercrombie & Fitch Co. has 5 brands:Abercrombie & Fitch, Hollister, abercrombie,

RUEHL, and Gilly Hicks (underwear and lingerie).

Most of ANFs products are sold through theirbrand-name stores, located in malls.

Market Cap = 1.56B

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Porters 5 Forces Degree of Rivalry- moderate/high

The teen fashion retail clothing industry is very competitive.

However, ANF has a competitive advantage over other specialtyretail clothing stories through its product differentiation. Theyhave many customers who are loyal to their product and brands.

Threat of Substitutes weak There are not many valid substitution threats to the retail clothing

business. Although wholesale distributers like B.J.s may take a bitaway from the retail clothing industry as a whole, those customersusually do not shop at ANF brand stores anyway.

Buyer Power - weak The buyers of ANF apparel are mainly individual consumers, since

ANF sells their brands in their own stores.

Therefore, the customers are weak since they are fragmented. Nocustomer has a particular influence on the product or price.

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Porters 5 Forces Supplier Power- weak/moderate

ANF does not own or operate any manufacturing plants. However, ANF receives its clothing from over 240 vendors who are

mainly foreign manufacturers. Therefore, no one (or few)supplier(s) has significant power over the company.

Barriers to Entry/ Threat of Entry - weak There are not many threats to entry into the market right now due

to the poor economy (decreasing prices/low sales/ increaseduncertainty) and the near luxury nature/ brand recognition ofANF.

ANF would not have only minor difficulties exiting the industry.

They do not have high exit costs since they do not own factories(only stores within high traffic areas such as malls). However, theydo have somewhat of a specialized asset. Since their clothing hastheir label, it may not be as valuable to other stores.

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SWOT Analysis

Strengths

Strong financial position as evidenced by balance

sheet

Excellent profit margins (66% gross, 19%

operating, 12% net)

Excellent Return on Equity: 29% over 5 years

Steady and profitable growth Share repurchases

Multiple strong and growing brands

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SWOT Analysis

Weaknesses $1.5 billion in contractual obligations over the next 5

years; expected to be paid out of cash fromoperations

Highly dependent on consumer tastes and trends Dependent on consumer discretionary spending

Opportunities International growth (few stores in Canada already

generate 3x productivity of US counterpart; openingstores in UK; international direct to consumer grew72% in 2007)

Strengthening and growing Hollister brand

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SWOT Analysis

Threats

Economic downturn reducing consumer spending,

cutting into sales and margins

Competition from other chains, specialty stores,

department stores, etc. could eat away market

share and hurt profits (especially lower-cost

producers in this economic climate)

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Financial Statement Analysis

2007 Third Quarter 2008

Current ratio 2.10 1.76

Quick ratio 1.29 0.63

Leverage 0.587 0.571

Balance Sheet

ANF is solvent, with an exception during 3rd

quarter of 2008 due to economic slowdown

Less than $200,000 of intangible assets: other

assets + other current assets

Inventory is a significant 29% of current assets

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2007 Industry

Net Profit Margin 12.7% 4.3%

Return on Assets 19.76%

Return on Equity 31.47% 14.5%

Cash Conversion Cycle 86 days

Interest Coverage Ratio N/A (no interest paid) 0.96

Income Statement

Year-over-year growth was 13% in 2007

However, third quarter net income fell 46% in

2008 from its level in 2007

Compared to the industry, ANF has favorableratios (above)

Same store sales fell 14%

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2007 Industry

Price/Book 0.7 1.1

Price/Earnings 2.8 7.7

Cash Flow and Valuation Ratios

2007

FCF/OCF .432

Short-Term Debt

Coverage

1.50

Abercrombie has adequate operating cashflow to easily cover its short term debt

Compared to other industry firms, ANF is cheap

The P/E and P/B ratios are extremely low

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Competitor Analysis

& Valuation Metrics American Eagle Outfitters

P/E: 6.6 P/B: 1.46 P/S: .57 D/E: 5.42%

ROE: 27% Operating Margin: 15% Gross: 43%

Sales: 3.08B Stores: 1,054

Gap P/E: 9.36 P/B: 2.24 P/S: .57 D/E: 4.35%


Sales: 15B Stores: 3,170

J. Crew P/E: 6.91 P/B: 4.45 P/S: .41 D/E: 42.36% ROE: 21% Operating Margin: 11% Gross: 41%

Sales: 1.44B Stores: 210

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Competitor Analysis

& Valuation Metrics Industry (from Yahoo!)

P/E: 7.1 P/S: .25

Operating Margin: 5% Gross: 41%

Sales: 1.44B

Abercrombie & Fitch

P/E: 3.66 P/B: 1.03 P/S: .39 D/E: 5.58%


Sales: 3.77B Stores: 3,170

Specific Advantages of ANF:

Has a lower P/E ratio than all its main competitors, showing that its undervalued and thatcomparatively you pay less for every dollar of earnings.

Its competitors are not exactly the same as ANF, since ANF does not engage in sales. Thus, itkeeps higher gross profit margins. It targets dedicated fashion-conscious buyers, not sale-seekers.

It has 5 different brands, so it can serve more markets than its competitors.

It owns two of the biggest brands in the industry, Abercrombie & Fitch and Hollister.

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Weighted Average Cost of Capital

eta from CAPM= 1.08

Total Capital: $2.3M

Total Debt: $100M (short-term debt)

Total Equity: $2.2M

Cost of Debt (4% of total capital): 1.80%

Cost of Equity (96%): 8.98%

Discount rate: 8.67%

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DCF Model

Value Per Share: 28.38

Closing Price (12/01): 16.47

Assumptions:

Growth rates: -6.0%, 0.0%, 2.0%, 4.0%, 4.0%, 4.0%,5.0%, 5.0%, 3.0%, 3.0%, 3.0%

Percent revenue: 81

Other General Expenses (Net): 0%

Goodwill Impairment (% revenue):0%

Net Interest Expense (% revenue):-.2%

Other Expense(% revenue) :0%

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Assumptions cont.

Depreciation & Amortization: 5%

Less: increase in Working Capital: 1%

Less: Capital Expenditures: 11%

Tax rate: 40%

Discount Rate: 10%

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Drawbacks

Abercrombie & Fitch, Co. sells discretionary consumergoods and we are in a recession, so consumption isdown.

They are forecasting a weak forth quarter, but webelieve that is already incorporated into the price.

The 14-30yr old fashion clothing market is verycompetitive and is susceptible to changes in tastes andstyles.

While two of their 5 brands are not doing well (RUEHLand Gilly Hicks), ANF is taking steps to rectify theselosses and turn the brands back around.

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Conclusion:Why ANF?

ANF has low valuation ratios meaning its

undervalued right now.

It owns highly recognized and stable brands.

The company targets many different niches

within the fashion-conscious retail market via its

brands, so there is less risk from changing trends.

There is a lot of room for growth once theeconomy picks up and consumer spending

increases.

Documents

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