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No. of Recommendations: 0
Dear Fools,

Could Abercrombie and Fitch be a potential Rule Maker? Taking a look at the company's numbers, I find it reasonable to say that this clothing retailer could be on its way to the elite stature of a competitor like The Gap. However, I am eager for the input of fellow Fools.

The only issue that flat-out denies Abercrombie's entrance into Rule Breaker land is the benchmark 1 billion dollar sales hurdle. Abercrombie right now is pulling in around 800 million in sales, and should be able to surpass the hurdle within the next few quarters.

Looking at the qualitative side of it all:

Familiarity – 0

Abercrombie is a powerful brand name among teenagers and the college crowd. The fact that it is not dilute like The Gap gives it both advantages and disadvantages. It has the power of pricing on its side, but it loses familiarity amongst the older, post-college crowd. It is rapidly expanding into the workplace though, taking advantage of the general trends in society for casual dress on the job. A zero, for now.

Openness – 1

Abercrombie is targeting all age groups, recently branching into the children's clothing market with their “abercrombie” stores.

Optimism – 1

Handsome, healthy, happy…That is what Abercrombie represents. Walk into any store and you will immediately find yourself surrounded with murals detailing fun, frolicking models.

Legitimacy – 1

Abercrombie's quality products set the industry standard. The interesting thing is, people are willing to pay a huge premium for this.

Inevitability – 1

You don't have to buy Abercrombie's clothes like you need to buy toothpaste or shavers. Although Gap does get a 1 in this field, so…hmm…I guess it is debatable.

Solitariness – 0

It's no Coke. Two major competitors right now – The Gap and American Eagle Outfitters.

Humor – 1

Handsome, healthy, happy!

Total Score – 5/7

Now to take a look at the business:

Mass Market, Repeated Purchase of Low-Priced Products – 1

Abercrombie's goods hold a slightly higher price than those of The Gap, but they are also the best quality in the industry. Customers are buying like hotcakes…unfortunately, customers are not of all ages.

Gross Margins – 1

42.157% this year. 38.5% last year. Rising every year.

Profit Margins – 2

12.5% this year. Rising every year as well. Gap's are 9%, but then again, Gap is a lot bigger.

Cash-to-Debt Ratio – 2+

Cash was up 283% this year to 164 million. Debt was cut from 50 million to the big, happy zero. Return on Equity was 88%. This company is generating more cash than it can invest, yet it is still returning phenomenally. Maybe it will even start paying dividends?

The Foolish Flow Ratio – 2

0.45 this year, compared to 0.99 last year. Lower than The Gap.

Your Familiarity and Interest – 2

I know a lot of Abercrombie fans, and I can follow fashion trends easily from where I stand. These 2 points are very subjective, however.

Total Score – 10/12

Now lets take a look at the metrics of business momentum:

Sales Growth – 3+

Definitely no problem here. Sales are soaring. Last year they increased by 56%. Net income was up 111%. Growth rates are predicted to be around 30% a year for the next five years, although I expect Abercrombie to surpass those figures, as they have blown away Wall Street's estimates consistently over the last couple of years.

Rising Gross Margins – 3+

The company's gross margins improved by nearly 5 percentage points.

Rising Net Margins – 3+

Again, the company's net margins are rising every year, by 2 or more percentage points.

Share Buybacks – 2

From 51 million shares to 52 million shares. But insiders in the last 12 months bought as many times as they sold.

Cash Outgrowing Debt – 3+

Quadrupled the cash, eliminated the debt. 'Nuff said.

Lower Flow Ratio – 3+

Flowie cut in half, from 0.99 to 0.45. OK, so a little more than half. It just sounds better to say that the Flowie was cut in half, rather than the Flowie was cut by 54.54 percent!

Expanding Possibilities – 3+

While a huge, burgeoning Gap has 2,500 stores, Abercrombie has only 200. Its expansion possibilities are limitless, and its management have been flawlessly executing. Teens and college students alike love their goods, and the company is slowly permeating into the work force as we have more and more casual Fridays.

I personally believe that business momentum/growth is Abercrombie's strongest asset. Its stellar performance almost reminds me of a younger Gap. Total Score – 20+/21

Lastly, lets look at how dominant the company is:

Gross margins 5 points ahead of its foremost competitor – 2

Gap is a competitor of Abercrombie and Fitch, but size-wise, it would be unfair to compare the two's gross margins considering Gap has so much more to manage. I am looking at American Eagle Outfitters as Abercrombie's main competition in the flourishing casual clothing market. AEOS's gross margins – 39%. Abercrombie's – 42%. Gap's – 41%.

Net margins 5 percentage points ahead of its foremost competitor – 2

Same deal. Abercrombie – 12.5%. Gap – 9%. AEOS – 9%.

A 25 percent better cash to debt position than the competition, or 5 times more cash – 4

Abercrombie has no debt, compared to greater than 400 million LTD taken on by Gap.

A Foolish Flow Ratio 25 percent below its foremost competitor – 4

Abercrombie has the lowest Flowie among the two clothing retailers, by a wide margin.

Name-brand victor through convenience – 2

Most of Abercrombie's stores are well-placed, which is vital for growth in this industry. For instance, it has a huge, four floor store in the middle of Quincy Market, one of the busiest shopping sites in all of Boston. Even so, its store numbers are limited, as it continues to expand, so it only gets a 2 here.

Total Score – 14/20

TOTAL SCORE – 49/60, which is second tier – although the company is growing very fast, so soon, Familiarity, Gross Margins, and Mass Market Appeal may all garner their full scores.

Comments, questions, bashings, criticisms? All welcome!



PS - Sorry if this was annoying, but I also posted this message on the Rule Makers Strategy board as well as the Abercrombie and Fitch board.

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