Even mall-facing retailers like Abercrombie & Fitch (NYSE:ANF) have had reason to smile of late, as the recovery narrative hits its stride and even the formerly most locked-down states ever shy away from the old plans. In fact, Abercrombie & Fitch recently saw a gain of 7.2% in its share price, and the recovery narrative—along with growing investor sentiment—is contributing heavily to these gains.
The Recovery Narrative, and Improving Sentiment
One of the biggest factors behind Abercrombie & Fitch's recent gains was an upgrade from UBS, which took the company up from “neutral” to land it squarely at “buy”. It was part of a larger list of companies getting upgraded recently at UBS, which included L Brands (NYSE:LB) and Kontoor Brands (NYSE:KTB), part of the “softlines retail” concept.
UBS, via analyst Jay Sole, pointed out that Abercrombie & Fitch—along with the other upgraded stocks—had “strong long-term growth prospects” that much of the market seems to be ignoring so far. With the companies making “bigger adaptations than previously thought”, Sole further noted, the notion of these companies seeing even greater growth patterns isn't out of line. Thus, the upgrades.
Sole looks for big things out of these companies, suggesting that the softline field could see gains between 7% and 13% into September, prompted by other analysts shifting their revisions upward in the face of “sell-side consensus EPS estimates.” Though any gains past September, Sole cautions, may be shaky as the rally is expected to end then.
Not So Fast, Says the Broader Pool
Meanwhile, the broader pool of analysts—based on our latest research—points out that Sole's analysis here may be a bit premature, and also a bit overblown. The current consensus calls for a “hold”, and has done so for the last two years and beyond.
A year ago, Abercrombie & Fitch had four “buy” ratings to its credit, along with five “hold” and two “sell.” Six months ago, that improved to the bullish with five “buy”, three “hold” and two “sell.” Three months ago, bearishness started to reassert itself a bit as the ratio moved to five “buy”, four “hold” and two “sell.” Today, we've returned to the levels seen six months ago, with five “buy,” three “hold” and two “sell.”
The price target, meanwhile, features a fairly broad range. While the average is currently sitting at $27.83, the current high of $38—held at B. Riley, and established just a couple weeks ago—is at serious odds with the current low of $18 held at Bank of America. Bank of America put that target out back in November, reports note, and raised it from its previous level of $9.
Is the Recovery Narrative Getting Stretched Thin?
The good thing about looking at an Abercrombie & Fitch investment is that it seems to have a shelf life. If Sole's predictions hold true, the rally should fade and the stock should level off sometime in September, which makes a certain sense. The “recovery narrative” concept has been applied to many different stocks so far, with a varying degree of rationality connecting each.
The notion of an Abercrombie & Fitch recovery isn't outlandish, and adding a limit to its expected gains seems like a smart hedge at this stage. After all, we're seeing states increasingly take off the coronavirus restrictions—even hard-hit states like New York and Michigan are restarting, even in the face of resurging numbers—so the likelihood of recovery actions starting up and lasting a good while should run for some time.
Eventually, however, the “recovery narrative” has to lose steam and become the “status quo,” otherwise it's not really a recovery any more. With the overall economy in a strange place—job listings are thick on the ground as government spending balloons—trying to pin down the likelihood of a recession in the near-term is fairly difficult. Still, with consumers throughout the United States—even in the less-locked-down area—eager for a return to something like normalcy and having some cash on hand from the recently-arrived (and still-arriving in some cases) stimulus payments, the idea of going back to Abercrombie & Fitch—or any other mall store—and shopping for clothes is likely a welcome return of simple former mundanity.
However, Abercrombie and Fitch will have plenty of competition on this front; with Simon Property Group (NYSE:SPG) taking a direct hand in maintaining mall-facing retailers, and several other brands like American Eagle Outfitters (NYSE:AEO) making similar comebacks, Abercrombie & Fitch will have to work hard to take advantage of the recovery narrative while it's still on hand. So far, it's done a fine job of that, but long-term, it may not be so simple.
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