Abercrombie & Fitch (ANF) reported Q1 2024 earnings Wednesday before the markets opened. The popular retailer crushed analyst estimates, sending its share price up 24% on the day. AMF stock is up 108% year-to-date and 503% over the past 52 weeks.
I wasn’t too surprised by the earnings beat. The retailer has been delivering for shareholders for a while now.
In August 2023, I discussed whether it was a buy or sell. While I suggested it might be a Hold based on the run it had been on, there was no reason to sell if you already owned it. Fast forward to today. It’s more expensive. At the time, its enterprise value (EV) was $3.14 billion, 13.5x EBITDA. Today, it’s $9.84 billion and 15.7x EBITDA.
Nonetheless, momentum investors continue to push its shares higher, which means other investors fear missing out and are willing to bid it up over the summer and into the fall.
In yesterday’s options trading, ANF had two unusually active options -- based on DTEs of 7 days or more and a Vol/OI ratio of 1.25 or higher -- with one put and one call.
Whether you’re bullish or bearish on ANF, here are some ways to play the two options.
ANF’s Unusually Active Options
Before getting into the bullish and bearish plays, here are the details of the two options.
1. June 7 $190 call: The volume on Wednesday was 650, 2.44x the open interest. It expires in eight days. The ask price was $7.10, a down payment of 3.7%. The delta was 0.51083.
2. June 21 $170 put: The volume on the put was 666 on Wednesday, 1.64x the open interest. It expires in 22 days. The bid price was $2.40, an annualized return of 21.6% based on a closing share price of $189.45. The delta was -0.18104.
The Bullish Take on ANF
It’s hard to believe that one of the best-performing stocks over the past year only has 10 analysts covering it. Worse still, only three rate it a Buy, with a target price of $167, 12% lower than where it’s currently trading thank’s to yesterday’s big move.
Abercrombie earned $2.14 a share in Q1 2024, 5.5x higher than a year ago and 41 cents better than the analyst estimate. On the top line, it had net sales of $1.0 billion, 22% higher year-over-year, and $58 million clear on the consensus.
While Hollister had good same-store sales growth, up 13%, the legacy Abercrombie brand boosted same-store sales by 29% in the quarter. It accounted for 56% of sales, up from 52% in Q1 2023.
For 2024, it now expects 10% net sales growth, up from its previous guidance of 5% at the midpoint of that outlook. It expects its operating margin to be 14%, 200 basis points higher than its prior outlook. Based on 2023 net sales of $4.28 billion, it should generate 2024 net sales of $4.71 billion and an operating profit of $659 million, 36% higher than a year ago.
There’s no question its business is in great shape.
If you already own the stock, you could do a covered call, selling the June 7 $190 call that expires a week tomorrow. This would generate a 160% annualized return on the $670 premium income.
If the share price moves above $190, the downside is that you’ll have to hand over 100 shares per put contract sold. If you’re bullish, you likely don’t want to part with your ANF stock to make $670.
Selling the June 21 $170 put with 22 days to expiration is likely the better move. With a bid price of $2.40, as I said earlier, you’ll generate an annualized return of nearly 22%, while the odds of its share price falling below $170 in the next three weeks, given its momentum, are minimal.
The Bearish Take on ANF
There is very little wrong with Abercrombie’s business, so any bearish take on ANF stock would be solely based on its valuation or overvaluation, as some might put it.
One of my favorite metrics for assessing a stock’s valuation is free cash flow yield (FCF), defined as free cash flow divided by enterprise value. Abercrombie’s trailing 12-month FCF through Q1 2024 is $603 million. Based on a $9.84 billion EV, its FCF yield is 6.1%. I consider anything between 4% and 8% to be fair value. Anything over 8% is value territory.
At least based on free cash flow, you’re barking up the wrong tree when it comes to a bearish take on Abercrombie.
The one metric you could hang your hat on for a bearish take is EV/EBITDA. As I said earlier, its EV is 15.7x its EBITDA, almost double its five-year average. However, when you consider its sales growth combined with Walmart’s (WMT) EV/EBITDA ratio of 14.5x, it isn’t stretched much.
However, if you’re bearish, you could sell a naked call, receiving $670 in income. Your breakeven would be $196.70. Ultimately, you want the share price to fall and stay below $190 for the eight days to expiration. If it jumps another $10 over the next week, you’re out $330 [196.70 less $200]. The losses are unlimited.
I would think twice before making this play.
Abercrombie remains an excellent stock to own despite yesterday’s gains.
On the date of publication, Will Ashworth 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.
