Abercrombie & Fitch or Lululemon Athletica: Which Retailer is a Better Buy This Holiday Season?

Lululemon Athletica Inc. (LULU) and Abercrombie & Fitch Co. (ANF) are two popular companies in the apparel retail industry. LULU designs, manufactures, and distributes men’s and women’s athletic apparel and accessories. The company sells its products through its Lululemon and Ivivva-branded stores, outlets and warehouse sales, yoga studios, health clubs, fitness centers, mobile apps, and lululemon.com e-commerce website. On the other hand, ANF offers an assortment of apparel, personal care products, intimates, and accessories for men, women, and children. The company sells its Abercrombie and Hollister brand products through its stores, direct-to-consumer channels, third-party wholesalers, franchises and licensing arrangements, and e-commerce platforms.

The strong digital presence established by most apparel retailers has enabled them to rebound from their pandemic-lows, introduce new fashion in sync with the changing consumer trends, and expand their reach. Moreover, rising foot traffic, declining jobless claims, and increasing consumer spending led to strong retail sales. The National Retail Federation (NRF) forecasts holiday retail sales to rise between 8.5% -10.5% during November and December. 

Although the recent breakout of the omicron coronavirus variant is expected to slow down foot traffic to the brick-and-mortar stores, e-commerce sales are to help the industry generate solid earnings this holiday season. Investors’ interest in retail stocks is evident from the SPDR S&P Retail ETF’s (XRT) 2.5% returns over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 1.2% gains. So, both LULU and ANF should benefit.

While LULU has gained 33.1% year-to-date, ANF has surged 86.3%. ANF is a clear winner with 67.7% gains versus LULU’s 26.8% in terms of their past year’s performance. But which of these stocks is a better pick now? Let us find out.

Latest Developments

On October 7, 2021, LULU announced the availability of MIRROR, its popular nearly invisible interactive home gym, in almost 40 lululemon stores across Canada and available for purchase in-store and online beginning on November 22. This launch in Canada strengthens and enhances its North America Omni guest experiences with cutting-edge digital and interactive capabilities.

On October 28, 2021, ANF launched a same-day delivery service across its entire U.S. store fleet and partnered with Uber Technologies, Inc. (UBER), Shipt, Postmates, and Roadie, and software provider Delivery Solutions, to expand its fulfillment capabilities. This initiative is part of ANF’s ongoing journey to transform its supply chain and deliver products quickly and efficiently that best meet its customers’ needs and shopping preferences.

Recent Financial Results

For the fiscal second quarter ended September 30, 2021, LULU’s net revenue increased 60.7% year-over-year to $1.45 billion. The company’s gross profit came in at $842.69 million, representing a 72.2% rise from the prior-year period. LULU’s income from operations came in at $291.03 million, up 133.9% from the prior-year period. While its net income increased 139.7% year-over-year to $208.07 million, its EPS increased 140.9% to $1.59. The company had $1.17 billion in cash and cash equivalents as of August 1, 2021.

For the fiscal third quarter ended October 30, 2021, ANF’s net sales increased 10.4% year-over-year to $905.16 million. The company’s gross profit came in at $576.24 million, marking a 9.9% year-over-year improvement. Its non-GAAP operating income came in at $79.48 million, representing a 22.4% rise from the prior-year period. ANF’s non-GAAP net income came in at $52.61 million for the quarter, indicating a 9.1% rise from the year-ago period. Its non-GAAP EPS increased 13.2% year-over-year to $0.86. The company had $865.62 million in cash and equivalents as of October 30, 2021.

Past and Expected Financial Performance

LULU’s net income and EPS have increased at CAGRs of 33.2% and 34.7%, respectively, over the past three years. The company’s levered free cash flow has increased at a CAGR of 29.8% over the past three years.

Analysts expect LULU’s EPS to increase 59.8% year-over-year in the current year and 19.7% next year. Its revenue is expected to grow 42.5% year-over-year in the current year and 15.9% next year. The stock’s EPS is expected to grow at a 31.9% rate per annum over the next five years.

In comparison, ANF’s net income and EPS have increased at CAGRs of 75.5% and 80.8%, respectively, over the past three years. The company’s levered free cash flow has increased at a CAGR of 52.5% over the past three years.

ANF’s EPS is expected to grow 738.4% year-over-year in the current year but decline 17% next year. The stock’s revenue is expected to grow 21% year-over-year in the current year and 2.2% next year. Analysts expect the stock’s EPS to grow 18% rate per annum over the next five years.

Valuation

In terms of non-GAAP P/E, LULU is currently trading at 61.21x, 670.9% higher than ANF’s 7.94x. In terms of forward EV/Sales, ANF’s 0.68x compare with LULU’s 9.38x.

Profitability

LULU’s trailing-12-month revenue of $5.52 billion is 1.5 times ANF’s $3.67 billion. LULU is also more profitable, with a 24.4% EBITDA margin versus ANF’s 13.5%.

Furthermore, LULU’s ROE, ROA, and ROTC of 35.4%, 18.1%, and 22.9% compare with ANF’s 32.4%, 6.8%, and 9.4%, respectively.

POWR Ratings

While ANF has an overall A grade, which translates to Strong Buy in our proprietary POWR Ratings system, LULU has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.  

In terms of Quality, both ANF and LULU have been graded an A, consistent with their higher-than-industry profitability ratios. ANF’s 63.4% trailing-12-month gross profit margin is 77.1% higher than the 35.8% industry average. In comparison, LULU has a 57.6% trailing-12-month gross profit margin, 61% higher than the industry average of 35.8%.

ANF has an A grade for Value, which is in sync with its lower-than-industry valuation ratios. ANF has a 0.68x forward EV/Sales, 52.3% lower than the 1.43x industry average. LULU’s D grade for Value reflects its overvaluation. LULU’s 9.32x forward EV/Sales is 550.3% higher than the industry average of 1.43x.

Of the 63 stocks in the A-rated Fashion & Luxury industry, LULU is ranked #44, while ANF is ranked #8.

Beyond what we have stated above, our POWR Ratings system has also rated ANF and LULU for Growth, Stability, Sentiment, and Momentum. Get all LULU ratings here. Also, click here to see the additional POWR Ratings for ANF.

The Winner

Given the rising consumer spending, offering of new fashion apparel through e-commerce platforms, and efficient delivery services, both LULU and ANF are well-positioned to benefit this holiday season, despite the concerns over the supply chain disruption and the omicron coronavirus variant. However, a lower valuation makes ANF a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Fashion & Luxury industry.

LULU shares were trading at $454.41 per share on Tuesday afternoon, down $8.85 (-1.91%). Year-to-date, LULU has gained 30.57%, versus a 23.04% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

More...