Greg
Public Equities Commentary
Abercrombie & Fitch can define what is cool, while Lululemon is a category leader that would have to change its identity to adapt. Abercrombie executed its e-commerce pivot, cut lower-tier mall exposure and de-emphasized logos, freeing it to be more creative. Fashion retail remains tough, with inventory planned 6-9 months out and price-sensitive consumers, but it trades at 7x earnings, buys back 12% of shares a year and holds $14 a share in cash on a $77 stock. x.com x.com x.comÂ
Abercrombie & Fitch looks crazy cheap at 7.4x trailing earnings with net cash equal to 23% of its value, as the company is printing money and has bought back 6.2% of its shares a year over the past five years. The downside risk is overstated. x.com x.comÂ
Abercrombie & Fitch is one of the strongest Stage 2 names outside the AI trade, a rare mix of price action, earnings and valuation. It made a power earnings gap on nearly 10x average volume after a long base, and trades at 12x forward earnings with a $6.5B market cap. x.comÂ
Gap is now cheaper than Abercrombie & Fitch, trading at 7.5x forward earnings with 16% net cash, so the setup might work. x.comÂ
Target looks appealing after fixing its inventory problems and returning to sales growth, while remaining far cheaper than its rival. It spent about four years on the inventory repair and cut prices on more than 10,000 products. x.comÂ
On Holding could rerate quickly from 9 times forward EBITDA back to 20 times if its growth decline slows or reverses, possibly in early 2027, while it holds premium gross margins. Over the past two quarters it deliberately held prices and protected its premium positioning, pulling back from wholesale toward direct-to-consumer. Its apparel business is growing 84%, small now but a clear sign its category expansion is working. x.comÂ
Lululemon is probably going lower because sales and margins are imploding while inventory grows, and a new unproven CEO is coming in. Q3 guidance calls for revenue down 10-11%, North America down mid-teens and inventory up low single digits; full-year revenue should fall 5-7% with inventory up mid single digits. Even granting $6 of annualized EPS versus a ~$4 run rate, 12x for an off-trend retailer implies about $70, versus $100 after an 18% drop. x.com x.comÂ
American Eagle should do well on earnings, as peers Gap and Abercrombie & Fitch jumped 15% and 40% after theirs. Tariff refunds and weight loss from oral GLP-1 drugs should help, while fashion is shifting away from the COVID-era gym clothes that favored Nike and Gen Z and Gen Alpha are adopting millennial nostalgia. x.comÂ
Lululemon is not worth bottom-fishing even though the bad news will eventually be priced in, because forward estimates keep falling and a bottom is hard to time before fundamentals bottom. The business is not a zero: its stores are still busy, if less than before. There are better places to look for a bargain. x.com x.com x.comÂ
Ollie's Bargain Outlet is among the companies reporting this week, with thoughts on its earnings shared alongside Campbell's, Duluth and Lululemon. x.comÂ
Urban Outfitters looks reasonably priced at about 12x earnings while testing a breakout to all-time highs. x.comÂ
