Citi On Abercrombie & Fitch: 'Out Of Sight, Out Of Mind?'

Traffic was a headwind for Abercrombie & Fitch Co. (NYSE: ANF) during Q2 — especially in U.S. flagship and tourist locations and in the international markets — and the company expects traffic trends to remain challenging in H2.

Citi’s Paul Lejuez maintains a Neutral rating on the company, while lowering the price target from $23 to $20.

Free Cash Flow

“Some might argue that ANF is an attractive stock based on its FCF yield of ~10 percent. However, we note that each comp point in F17 is worth ~$0.20 in EPS, or about ~$10 million in operating cash flow,” Lejuez mentioned.

The analyst expects free cash flow (FCF) to decline 1 percent in F17. However, if comps were to decline 3 percent in F17, the free cash flow estimate for the year would also decline from $110 million to $90 million. If comps declined another 3 percent in F18, the free cash flow estimate would fall to $65 million.

“This would paint a very different picture of FCF,” Lejuez stated.

Related Link: Abercrombie & Fitch Shares Plummet 14% After Missing EPS Estimates For Second Straight Quarter

Comps Could Decline

The analyst went on to say that despite Abercrombie & Fitch closing a third of its U.S. stores over the last six years, U.S. comps had declined during F13–F16. Therefore, comps remaining negative was not an unimaginable scenario.

“That the U.S. business has not benefitted from sales transfer to stores that remain open (or Ecom) is a troubling sign for the U.S. brands. It's kind of like "out of sight, out of mind", and misses out on the potentially favorable economics of closing less productive stores,” Lejuez explained.

The F16 and F17 EPS estimates have been lowered, primarily to reflect lower margins.

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