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MIT 3 11 - Business Analysis

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1 Analysis of Abercrombie & Fitch Report by 3one2.comAnalysts:Daisy Suryo, Gregory Nathan, Pei-Chun Shang and Jennifer Gold Investment Recommendation: MARKET PERFORMER March 20, 2001 EPS Forecast: ANF FYE 1/31 2001A 2002E 2003E 2004E EPS 1.56 1.80 2.15 2.59 Ratios Firm Average of Competitors Forward P/E 18.61 18.01 Forward PEG 0.94 1.06 (median) Forward P/B 5.55 4.68 P/S 2.67 1.32 Valuation Predictions: ANF Actual Price P/E Valuation PEG Valuation P/S Valuation P/B Valuation EBO (Abnormal Earnings) Valuation DCF Valuation $33.50 $32.41 $38.01 $16.54 $28.29 $15.98 $31.20 ANF- NYSE (3/20/01) 52 Week High 52 Week Low Beta Revenue (FY 2001) Market Capitalization Share Outstanding Dividend Yield Institutional Holdings Avg. Daily Trading Volume Book Value per Share Return on Equity Est. 5 Yrs EPS Growth Rate Industry $33.50 $33.50 $8.00 1.23 $1,237.60Mil $3.28Bil 98.80Mil 0 80% (95% of float) 1.60Mil $4.24 49.33% 20.00% Specialty Retail Performance: ANF Trailing Actual Relative to S&P500 Relative to Competitors 13wk 26wk 52wk 92.8% 29.5% 107.1% 120.9% 64.5% 177.6% 95.0% 70.0% 91.0% • Recommend a Market Performer rating on Abercrombie & Fitch’s stock based on valuation analyses • Strong brand equity allows new stores to generate sales quicker than most of its competitors • Domestic and potential International expansion will be the driving force in its growth • Significant growth potential via new stores under its abercrombie kids and Hollister Co. names • Increasing productivity by opening smaller stores to increase sales per avg. gross square feet • Difficult to grow revenues through increase in margins due to them being relatively high (23.23% compared to its competitors avg. of 11.9%) • Same store sales has decreased significantly in the past two years (negative growth in FY2001) along with a decrease in sales per average store in FY2001 Rating System: BUY: A strong purchase recommendation with above average long-term growth potential. MARKET OUTPERFORM : A purchase recommendation that is expected to marginally outperform the return of the market. MARKET PERFORMER: A recommendation to maintain current positions with returns to match that of the market. SELL: A recommendation to sell the security (or short the sec urity) as it is expected to decrease in price in the medium term.2Business Analysis Core Business Description Established in 1892, Abercrombie & Fitch (ANF) was well known as a supplier of rugged, high quality outdoor gear. One hundred years later, ANF was repositioned as a more fashion-oriented apparel store, targeting ages 18 through 22. In 1988 The Limited acquired ANF. The company went public in October of 1996 followed by a spin-off from The Limited in May of 1998. ANF introduced abercrombie kids in 1997 to target children ages 7–14. Finally, starting in July 2000 ANF opened five Hollister Co. stores, targeting 14-18 year olds. Currently ANF is in the business of purchasing, distributing, and selling men’s, women’s and kids’ quality, casual and classic American sportswear apparel. The merchandise is sold in one of 350 ANF owned and operated retail stores throughout 37 States as well as through catalogs. ANF also runs an e-commerce website at www.abercrombie.com as well as a kids website at www.abercrombiekids.com. ANF has a policy of maintaining sufficient quantities of inventory so that it can offer its customers a full selection of current merchandise. It also concentrates on accomplishing a rapid turnover. ANF faces a very seasonal sales pattern, resulting in increased inventory during back-to-school and Christmas holiday selling times. Risks • Competitive pressures in the retail apparel industry/market saturation • ANF in mature stage of growth • Less consumer spending in apparel due to slowing of economy • Change in consumer preferences • Missing the next trend • Political/financial instability in countries where goods are manufactured • Challenge of international expansion • Risk of rising interest rates • Trade Restrictions Competitors Gap A global clothing retailer that runs over 3,650 stores, mostly in the U.S., but also in Canada, France, Germany, Japan, and the UK. Its flagship Gap stores offer a wide variety of men's and women's casual clothing. The company's other chains include Banana Republic, GapKids, babyGap, and its fastest growing, Old Navy. Each chain also has an online incarnation. The Gap is adding GapBody intimate apparel stores and restaurants in flagship Old Navy stores. American Eagle Once a purveyor of outdoor sports apparel and equipment, American Eagle Outfitters (AE) has grown immensely in the past few years. The retailer now sells collegiate-style casual apparel and accessories (shirts, pants, shorts, sweaters, skirts, footwear, belts, and bags) aimed at men and women ages 16-34. Virtually all the company's wares bear its private-label brand names: American Eagle Outfitters and AE. AE operates over 550 mall-based stores in 47 states (primarily east of the Rockies) and Washington, DC, and is expanding. The Limited The Limited is as much of a shopping-mall mainstay as food courts and teenagers. The retailer operates about 5,000 stores in the U.S., focusing mostly on clothing for women. Its women's apparel stores include The Limited, Express, Lerner New York, Lane Bryant (which it is selling), and Henri Bendel. Its Structure stores (to be renamed Express Men's) offer men's clothing. The Limited also owns 84% of Intimate Brands, which operates Victoria's Secret, Bath & Body Works (personal care product stores), and White Barn Candle Co. (candles and fragrances). In addition, it has a 40% stake in Galyan's Trading Co. (sporting goods). Gadzooks Gadzooks is a mall-based, specialty retailer of casual apparel and related accessories for young men and women, principally between the ages of 14 and 18. Gadzooks experienced 20% of sales growth for the FYE 2/3/01. This results from the opening of new stores, the introduction of the private label merchandise, and operational improvements in existing stores. In the year 2001 alone, Gadzooks launched Decibel, the company's newest private label


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