Abercrombie & Fitch Co. (NYSE:ANF) shares are up more than 41.42% this year and recently decreased -3.85% or -$0.68 to settle at $16.97. Duluth Holdings Inc. (NASDAQ:DLTH), on the other hand, is down -40.12% year to date as of 12/14/2017. It currently trades at $15.21 and has returned -4.97% during the past week.
Abercrombie & Fitch Co. (NYSE:ANF) and Duluth Holdings Inc. (NASDAQ:DLTH) are the two most active stocks in the Apparel Stores industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect ANF to grow earnings at a 18.00% annual rate over the next 5 years. Comparatively, DLTH is expected to grow at a 20.00% annual rate. All else equal, DLTH’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 12.45% for Duluth Holdings Inc. (DLTH). ANF’s ROI is 1.80% while DLTH has a ROI of 18.60%. The interpretation is that DLTH’s business generates a higher return on investment than ANF’s.
If there’s one thing investors care more about than earnings, it’s cash flow. ANF’s free cash flow (“FCF”) per share for the trailing twelve months was +0.58. Comparatively, DLTH’s free cash flow per share was -1.26. On a percent-of-sales basis, ANF’s free cash flow was 1.19% while DLTH converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, ANF is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. ANF has a current ratio of 2.10 compared to 2.50 for DLTH. This means that DLTH can more easily cover its most immediate liabilities over the next twelve months. ANF’s debt-to-equity ratio is 0.00 versus a D/E of 0.19 for DLTH. DLTH is therefore the more solvent of the two companies, and has lower financial risk.
ANF trades at a forward P/E of 95.34, a P/B of 1.00, and a P/S of 0.34, compared to a forward P/E of 17.81, a P/B of 4.16, and a P/S of 1.44 for DLTH. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. ANF is currently priced at a 23.96% to its one-year price target of 13.69. Comparatively, DLTH is -30.86% relative to its price target of 22.00. This suggests that DLTH is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.10 for ANF and 2.30 for DLTH, which implies that analysts are more bullish on the outlook for ANF.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. ANF has a short ratio of 5.47 compared to a short interest of 18.62 for DLTH. This implies that the market is currently less bearish on the outlook for ANF.
Duluth Holdings Inc. (NASDAQ:DLTH) beats Abercrombie & Fitch Co. (NYSE:ANF) on a total of 8 of the 14 factors compared between the two stocks. DLTH has higher cash flow per share, is more profitable, generates a higher return on investment and higher liquidity. DLTH is more undervalued relative to its price target. Finally, EXPR has better sentiment signals based on short interest.