I was chatting with a wealthy friend last week about the
portfolio returns on
. He interrupted me with an odd question: "Yeah, but how much did
a millionaire make?!"
I wasn't quite following him, and then it struck me. He was
under the impression that large stock transactions earn a higher
percentage of profit than small transactions do. And he was
My friend is a self-made man, with several successful careers
under his belt... but clearly none of them required a good
working knowledge of math.
When a stock goes up 10%, all shareholders make 10% profit --
from the millionaire down to the guy who owns just one share. For
Gilead Sciences (NYSE:
up 13.6% since I wrote about it a couple of months
. All investors who bought then are up 13.6%, with slight
variations based on transaction fees.
(Fees are a factor, yes, but you can't assume that the rich
guy pays lower fees. As a matter of fact, small investors often
manage their own accounts, with ridiculously low transaction
fees, and millionaires frequently pay somebody an annual fee to
manage their accounts. The case could be made that the small
investor has a lower-fee advantage.)
The stock I want to profile today has posted an 85% total
return over the past five years -- for millionaires and less
well-heeled investors alike.
Abercrombie & Fitch (NYSE:
is a global fashion retailer, with over 1,000 stores. The company
has been in business for 122 years and sells a wide variety of
casual luxury apparel through four brands that target children,
teens and young adults.
Abercrombie is at a pivotal point. After sales reached a
record $4.5 billion in fiscal 2013, sales fell to $4.1 billion in
fiscal 2014, and are expected to fall again in the current fiscal
year, to just over $4 billion, followed by a slight increase next
Abercrombie & Fitch is a 122-year-old company
that has more than 1,000 stores around the
So the key questions are: What is management doing to turn the
situation around, and will the turnaround efforts be
Recent management changes have resulted in new brand
presidents and a new chairman. In June, Abercrombie hired
Christos Angelides, a former group product director for
Next PLC (
, a U.K. fashion retailer that's about 50% larger than
Abercrombie, as president of its Abercrombie & Fitch and
Abercrombie Kids brands.
Wall Street is expecting Abercrombie to address its fashion
viability and competitiveness vs. other fast-fashion retailers,
such as Forever 21.
The board of directors also experienced a shake-up this year,
with three board members departing as their terms expired.
Activist investor Engaged Capital persuaded the company to
appoint four new independent directors to its board.
Abercrombie's cost-cutting efforts are ongoing, including the
closing of more than 60 stores and the restructuring of its Gilly
Hicks brand. Growth in higher-margin sales, including both
internationally and online, is contributing to increased
profitability. Standard & Poor's forecasts Abercrombie's
margins on earnings before interest and taxes (EBIT) will climb
from 5.4% in fiscal 2014 to 6.9% in 2015 and 8% in 2016.
Abercrombie posted $1.91 in earnings per share (
) in fiscal 2014 (before restructuring charges). The consensus
estimate for EPS growth is 24% this year to $2.36, and another
19% next year to $2.80. That projection is higher than
Abercrombie's recent guidance, indicating that the Street is
expecting aggressive earnings growth.
Abercrombie's balance sheet is strong, with plenty of cash for
dividends, share repurchases, and keeping debt at bay. The
forward yield is 1.9%, with a payout ratio of 34% on estimated
fiscal 2015 earnings. The long-term debt-to-capitalization ratio
is 9.4%. And Abercrombie recently authorized a repurchase plan
for 16.3 million shares.
ANF is a mid-cap growth stock. Ninety percent of its shares
are held by institutions, with Fidelity Investments owning the
biggest position, a 13.5% stake.
Abercrombie's share price has been slowly improving all year.
The stock broke out of another trading range in mid-June, and is
heading toward short-term price resistance at $46. I expect the
stock to pause there, then head toward the next resistance level
at $54. At that point, today's investors will have a total return
of about 31%.
Risks to Consider:
A weakening global economy, fashion and inventory risk, or
delayed store openings could keep ANF from performing as
expected. With a beta of 1.8, Abercrombie's stock is distinctly
more volatile than its teen apparel peers.
Action to Take -->
Abercrombie shares should appeal to value, growth and income
investors alike. My target price is $47.20, based on an increase
in ANF's price-to-earnings (P/E) ratio to 20, which is in the
upper end of its historical range and represents upside of
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