We Foresee 2025 Expansion With Hollister Will Bring Mixed Outcomes

Key Takeaways

• Expanding store experiences and global growth focus could drive revenue and boost brand visibility in key international markets.
  
• Strategic pricing and efficient inventory management aim to maintain strong margins and shareholder value, signaling confidence in financial health.
  
• Increased costs and expenses, including freight and marketing, could squeeze margins, while uneven sales and currency issues may hinder revenue and profit growth.

Catalysts

Through its subsidiaries, operates as an omnichannel retailer in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific.

• Abercrombie & Fitch plans to continue expanding its store footprint with around 100 new experiences in 2025, including 60 new stores, suggesting potential revenue growth driven by increased physical presence and market reach.
  
• The company’s focus on global growth opportunities, such as an increase in brand engagement in key international markets like the U.K. and Germany, could boost future earnings by capturing larger market shares and enhancing brand visibility.
  
• Sustaining double-digit AUR (average unit retail) increases across both Abercrombie and Hollister suggests a strategy to maintain or improve net margins through strategic pricing and product value perception.
  
• The agile Read & React inventory model, which allows the company to align inventory closely with customer demand, is expected to contribute to maintaining healthy gross margins by reducing markdowns and optimizing sales through efficient inventory management.
  
• A new $1.3 billion share repurchase authorization reflects a potential path for enhancing shareholder value, which could improve earnings per share and signal confidence in long-term financial health and profitability.

Abercrombie & Fitch Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Abercrombie & Fitch compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Abercrombie & Fitch's revenue will decrease by 0.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 11.4% today to 10.0% in 3 years time.
• The bearish analysts expect earnings to reach $502.9 million (and earnings per share of $11.25) by about April 2028, down from $566.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.9x on those 2028 earnings, up from 6.0x today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.2x.
• Analysts expect the number of shares outstanding to decline by 4.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.11%, as per the Simply Wall St company report.

Abercrombie & Fitch Future Earnings Per Share Growth

Risks

• The company anticipates increased freight costs negatively impacting margins, which may lead to higher costs in the first half and affect overall profitability for the year.
  
• There is risk from potential inventory accumulation due to uneven sales across brands, which could impair their balance sheet and reduce net margins if clearance is needed.
  
• The adverse impact of the 53rd week in 2023 on prior-year sales comparisons and continuing foreign currency headwinds could impair expected revenue growth and financial results.
  
• The projected flat operating margin for 2025 at the upper end of revenue growth guidance suggests limited future operating leverage, which may restrict earnings growth.
  
• Increased reliance on marketing spend to drive sales growth may not deliver sufficient return on investment to offset higher expenses, putting pressure on net margins and overall earnings.

Valuation

• The assumed bearish price target for Abercrombie & Fitch is $93.58, which represents one standard deviation below the consensus price target of $125.47. This valuation is based on what can be assumed as the expectations of Abercrombie & Fitch's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $171.2, and the most bearish reporting a price target of just $71.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.0 billion, earnings will come to $502.9 million, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 8.1%.
• Given the current share price of $69.42, the bearish analyst price target of $93.58 is 25.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.