After suffering sharp losses throughout much of 2022 due to skyrocketing inflation, fashion retailer Abercrombie & Fitch (ANF) in the past few months generated incredible momentum. In addition, an estimate-beating performance in the company’s most recent third-quarter earnings report appears to bode well for ANF stock. However, shifting economic tides – confirmed by bearish unusual options volume – suggests stakeholders should take corrective action.
At first glance, ANF stock might seem a worthwhile speculative bet. For instance, despite the turbulence in the equities sector recently, shares gained over 4% in the trailing month. Moreover, Zacks Equity Research noted that Abercrombie beat analysts’ consensus targets for earnings per share and revenue.
Specifically, the fashion icon reported adjusted EPS of 1 cent in Q3. This compared very favorably to the consensus target calling for a loss of 13 cents. On the top line, the company posted net sales $880 million, beating out the consensus estimate of $829 million. So far, so good.
However, against the year-ago quarter, circumstances didn’t appear so compelling. For instance, in Q3 2021, Abercrombie posted EPS of 86 cents. Also, revenue at that time stood at $905 million. Still, because of improvements in sales trends amid a rough economic backdrop, investors were willing to give a pass to ANF stock.
However, patience may be running out. Following the close of the Feb. 24 session, Abercrombie (unfortunately) stood out as a highlight in Barchart.com’s unusual stock options volume screener. Volume reached 5,254 contracts against an open interest reading of 41,823. The delta between the Friday session volume and the trailing one-month average volume came out to 141.12%.
Drilling into the details, call volume reached 1,248 contracts. However, put volume jumped to 4,006. Therefore, the put/call volume ratio pinged at 3.21, mathematically favoring the bears. Moving forward, investors should consider three other reasons why caution is necessary for Abercrombie & Fitch.
ANF Stock Already Jumped High Enough
On paper, the Barchart Technical Opinion rating suggests that ANF stock is a strong buy. While it might be so from a short-term outlook, against the bigger picture, investors might want to consider this indicator as a contrarian gauge. Primarily, it’s quite possible that shares have already stormed high enough.
Consider just the raw numbers. In the trailing six months, ANF stock soared nearly 83%. Since the January opener, shares moved up almost 23%. Nevertheless, because Abercrombie plies its trade in the consumer discretionary industry, it may be wise to at least trim some exposure. And it’s not about hating on the enterprise. Rather, investors may be better served redirecting the above profits to relatively safer investments.
As well, analyst opinion doesn’t facilitate an encouraging view of ANF stock. Presently, Wall Street experts peg Abercrombie as a consensus hold. Not only that, their average price target stands at $28, implying more than 3% downside risk.
Higher Rates, More Job Cuts
As Barchart contributor Rich Asplund mentioned, the major equity indices fell as “…stronger-than-expected U.S. economic reports [on Friday] on Jan personal spending and Jan core PCE deflator, the Fed’s preferred gauge of inflation, rose more expected.” In most contexts, a strong economy represents a net positive. However, it also means that more money chases after fewer goods, an inflationary dynamic.
Obviously, the Federal Reserve aims to control inflation through raising the benchmark interest rate. Therefore, it’s well within reason to assume that the central bank will resume its aggressive rate-hiking policy. If so, such an action could very well spark a recession. That would translate to less money chasing after more goods – exactly what Abercrombie doesn’t need.
Since Q1 2022, the company’s net income line turned negative. Should the consumer economy suffer further pressures, it’s too easy for people to give up discretionary items like fashion. Therefore, overexposure to ANF stock presents high risks.
The Brand is Bland
Several years ago, Abercrombie had a much different look. Back then, management wanted to spice things up. However, it turned up the knob way too much, leading to sharp criticisms of discrimination in various forms. To its credit, new leadership took over and cleaned up the mess. However, by taking care to being inoffensive, it lacks distinction.
Please do not misread this: I absolutely do not suggest that Abercrombie repeat its prior controversies and mistakes. However, in the fashion world, one must be willing to take risks, push the boundaries, get people talking about the brand. Today, there’s really no reason to talk about Abercrombie & Fitch.
Tack on a possible economic recession and it’s easy for customers to dump Abercrombie for cheaper fare. When no compelling reasons exist to own the product, there’s little incentive for consumers to incur pain in the wallet to attain it. Thus, investors need to be extremely careful about ANF stock.
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On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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