3 Reasons Why Growth Investors Shouldn't Overlook Abercrombie (ANF)

The Home Depot Inc. HD has reported third-quarter fiscal 2024 results, wherein earnings and sales surpassed the Zacks Consensus Estimate. Meanwhile, the company’s top line improved year over year in the third quarter of fiscal 2024, while earnings per share declined year over year.

Home Depot's adjusted earnings of $3.78 per share declined 1.8% from $3.85 in the year-ago quarter. However, the bottom line beat the Zacks Consensus Estimate of $3.65.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

Net sales advanced 6.6% to $40.2 billion from $37.7 billion in the year-ago quarter. Also, sales surpassed the Zacks Consensus Estimate of $39.33 billion. The company’s sales included contributions from the recently completed acquisition of SRS Distribution Inc.

Shares of Home Depot rose 1.4% in the pre-market trading session on Nov. 12 due to HD’s robust third-quarter performance and raised view for fiscal 2024. The Zacks Rank #2 (Buy) company’s shares have rallied 16.6% in the past three months compared with the industry's rise of 16.4%.

Tractor Supply Company TSCO seems to be in a good spot, thanks to its sturdy business strategies. The company is reaping the benefits from its Life Out Here Strategy and the Neighbor’s Club membership program. Its ‘ONETractor’ strategy, which is aimed at connecting stores and online shopping, appears encouraging too. Shares of this leading rural retail farm and ranch store chain have gained 32.6% year to date against the industry’s 3.1% decline.

Recently, Tractor Supply revealed that it had agreed to acquire Allivet, which is a privately-held leading online pet pharmacy. This buyout will complement and reinforce the company’s portfolio of companion animals, equestrian and livestock customers. The deal will also enable TSCO to introduce a low-cost pet and animal pharmacy solution for the 37-million Neighbor’s Club members.

The new deal brings a key opportunity to gain share of wallet with the club members, about 75% of whom are pet owners. The deal will also strengthen the company’s product and services offering, extend its overall addressable market by $15 billion and solidify relationship between the companies.

TSCO’s Growth Strategies in Detail

Given the changing consumer trends, Tractor Supply is focused on integrating its physical and digital operations to offer consumers a seamless shopping experience. The company’s omnichannel investments include curbside pickup, same day and next-day delivery, a re-launched website and new mobile app. Management aims at leveraging AI technologies to boost search, redesign checkout and add a new refreshed homepage on personalization.

TSCO is significantly enhancing its Neighbor's Club offering. As the company continues to make investments in the program, it has been seeing strong growth in customer counts and customer retention. In the third quarter of 2024, the Neighbor's Club comp sales surpassed the company’s overall sales. Tractor Supply has reached an all-time high on its sales penetration, recording membership of more than 37 million members.

The company is also focused on improving personalization capabilities, mainly its customer data platform. Its live goods performance also bodes well. Digital sales continued to outperform, with double-digit growth in the third quarter of 2024. The company has been making major improvements in search and checkout. It has been accelerating its digital capabilities, which has been leading to higher customer engagement and conversion rate improvement.

Regarding its store-growth initiatives, Tractor Supply is persistently focused on the expansion of its store base and the incorporation of technological advancements to boost traffic and drive the top line. In the third quarter, TSCO introduced 16 flagship stores, bringing the year-to-date count to 54. Management intends to continue its store-opening initiatives in 2024.

Project Fusion is the company’s state-of-the-art space productivity program built to enrich customer experience in the mature store base. It currently has 45% of the chain in its Project Fusion layout and more than 550 garden centers. Such store investments target higher market share and boost productivity across the existing and new stores. Addition of product categories, greater ease of shopping and modern services enables the company to serve its customers efficiently.

Factors Hindering TSCO’s Growth

Tractor Supply has been reeling under higher depreciation and amortization along with the costs related to the opening of a distribution center. Also, cost inflation is concerning. During the third quarter, selling, general and administrative (SG&A) expenses, including depreciation and amortization, as a percentage of sales, expanded 119 basis points (bps) year over year. In dollar terms, the metric rose 6.2%.

The higher SG&A expense rate resulted from growth investments, which comprised the onboarding of a new distribution center, lapping a one-time depreciation cost benefit in the last year and modest deleveraged fixed costs. The new distribution center was nearly a 25-bps headwind on SG&A for the quarter. Further, the operating income was down 4.8% year over year, with the operating margin declining 63 bps to 9.4% in the reported quarter. In addition, a tepid retail sales environment is concerning.

Conclusion

TSCO has been taking cost-saving initiatives to tackle cost issues. Analysts seem quite optimistic about the company. The Zacks Consensus Estimate for 2024 sales and earnings per share (EPS) is currently pegged at $14.9 billion and $10.24, respectively. These estimates indicate corresponding growth of 2.5% and 1.5% year over year. The consensus estimate for 2025 sales and EPS is presently pegged at $15.7 billion and $11, respectively, indicating a year-over-year increase of 5.1% and 7.4%. Tractor Supply currently carries a Zacks Rank #3 (Hold).

Key Picks

We have highlighted three better-ranked stocks, namely Boot Barn BOOT, Abercombie ANF and Deckers DECK.

Boot Barn, a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The company has a trailing four-quarter earnings surprise of 6.8%, on average.

The Zacks Consensus Estimate for Boot Barn’s current financial-year sales indicates growth of 13.9% from the year-ago figure.

Abercrombie, a leading casual apparel retailer, currently carries a Zacks Rank of 2 (Buy). ANF delivered an earnings surprise of 16.8% in the last reported quarter.

The consensus estimate for Abercrombie’s current financial-year sales indicates growth of 13% from the year-ago figure.

Deckers, a footwear and accessories dealer, currently carries a Zacks Rank of 2. DECK delivered an average earnings surprise of 41.1% in the trailing four quarters.

The Zacks Consensus Estimate for Deckers’ current financial-year sales indicates growth of 13.7% from the year-ago figure.

Zacks Investment Research

First Watch Restaurant Group, Inc. FWRG has entered into an agreement to acquire 15 franchise-owned locations and one restaurant under construction in North and South Carolina for a total of $49 million.

The transaction is expected to close by mid-April 2025, subject to customary closing conditions, and will be funded with a combination of cash and borrowings from the company’s credit facility.

The company views strategic acquisitions of franchise-operated restaurants as a key component of its long-term growth and value-creation strategy. The addition of these 16 restaurants and its development rights will strengthen First Watch Restaurant’s corporate presence in the East Coast.

This acquisition is part of First Watch Restaurant’s ongoing expansion strategy. Since May 2023, the company has acquired 45 franchised restaurants through six transactions, significantly increasing its presence across key markets. The company’s continued expansion highlights its strong growth in the daytime dining sector.

This move will also open up new territories for organic growth in the future. First Watch Restaurant expects these restaurants to perform at levels similar to its company-owned locations, generating strong unit volumes and restaurant-level operating profit margins.

Shares of FWRG moved up 1.7% and 1.2% during yesterday’s trading session and after-hours, respectively.

FWRG Expands Presence With Franchise Acquisition

Investors looking for opportunities in the restaurant sector should pay attention to FWRG's strategic acquisitions, as these position the company for long-term growth and value generation in a competitive market.

On April 15, 2024, the company completed the acquisition of 21 franchise-owned restaurants in North Carolina for $75 million. This transaction supports First Watch Restaurant’s strategy to strengthen its market presence and drive continued growth.

In the third quarter of 2024, the company opened nine new system-wide restaurants across eight states. This brings the total number of system-wide restaurants to 547, including 466 company-owned and 81 franchise-owned locations, as of Sept. 29, 2024, across 29 states.

Shares of the company have gained 24.7% in the past year compared with the Zacks Retail – Restaurants industry’s growth of 13.4%. The company is benefiting from new restaurant openings and increased focus on strategic franchise acquisitions.

In the fourth quarter, the company expects to open 23 new restaurants. First Watch Restaurant aims to grow the size of its system by 10% or more annually. The company is currently managing more than 120 projects in its development pipeline. Many of these projects are planned for opening in 2025 and 2026.

FWRG’s Zacks Rank & Key Picks

FWRG currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks from the Zacks Retail-Wholesale sector have been discussed below.

Abercrombie & Fitch Co. ANF currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

It has a trailing four-quarter earnings surprise of 28%, on average. The stock has risen 111.3% in the past year. The Zacks Consensus Estimate for ANF’s fiscal 2024 sales and earnings per share (EPS) implies growth of 13% and 63.9%, respectively, from the year-ago levels.

Brinker International, Inc. EAT currently flaunts a Zacks Rank of 1. It has a trailing four-quarter earnings surprise of 12.1%, on average. The stock has risen 245.7% in the past year.

The Zacks Consensus Estimate for EAT’s fiscal 2025 sales and EPS indicates a rise of 8% and 32.4%, respectively, from the year-ago numbers.

El Pollo Loco Holdings, Inc. LOCO currently sports a Zacks Rank #1. It has a trailing four-quarter earnings surprise of 26.1%, on average. Shares of LOCO have gained 57.9% in the past year.

The Zacks Consensus Estimate for LOCO’s 2024 sales and EPS indicates a rise of 0.7% and 16.9%, respectively, from the year-ago numbers.

Zacks Investment Research

The recommendations of Wall Street analysts are often relied on by investors when deciding whether to buy, sell, or hold a stock. Media reports about these brokerage-firm-employed (or sell-side) analysts changing their ratings often affect a stock's price. Do they really matter, though?

Let's take a look at what these Wall Street heavyweights have to say about Abercrombie & Fitch (ANF) before we discuss the reliability of brokerage recommendations and how to use them to your advantage.

Abercrombie currently has an average brokerage recommendation (ABR) of 2.00, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by eight brokerage firms. An ABR of 2.00 indicates Buy.

Of the eight recommendations that derive the current ABR, four are Strong Buy, representing 50% of all recommendations.

Brokerage Recommendation Trends for ANF

The ABR suggests buying Abercrombie, but making an investment decision solely on the basis of this information might not be a good idea. According to several studies, brokerage recommendations have little to no success guiding investors to choose stocks with the most potential for price appreciation.

Are you wondering why? The vested interest of brokerage firms in a stock they cover often results in a strong positive bias of their analysts in rating it. Our research shows that for every "Strong Sell" recommendation, brokerage firms assign five "Strong Buy" recommendations.

This means that the interests of these institutions are not always aligned with those of retail investors, giving little insight into the direction of a stock's future price movement. It would therefore be best to use this information to validate your own analysis or a tool that has proven to be highly effective at predicting stock price movements.

With an impressive externally audited track record, our proprietary stock rating tool, the Zacks Rank, which classifies stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), is a reliable indicator of a stock's near -term price performance. So, validating the Zacks Rank with ABR could go a long way in making a profitable investment decision.

ABR Should Not Be Confused With Zacks Rank

Although both Zacks Rank and ABR are displayed in a range of 1-5, they are different measures altogether.

The ABR is calculated solely based on brokerage recommendations and is typically displayed with decimals (example: 1.28). In contrast, the Zacks Rank is a quantitative model allowing investors to harness the power of earnings estimate revisions. It is displayed in whole numbers -- 1 to 5.

Analysts employed by brokerage firms have been and continue to be overly optimistic with their recommendations. Since the ratings issued by these analysts are more favorable than their research would support because of the vested interest of their employers, they mislead investors far more often than they guide.

In contrast, the Zacks Rank is driven by earnings estimate revisions. And near-term stock price movements are strongly correlated with trends in earnings estimate revisions, according to empirical research.

In addition, the different Zacks Rank grades are applied proportionately to all stocks for which brokerage analysts provide current-year earnings estimates. In other words, this tool always maintains a balance among its five ranks.

There is also a key difference between the ABR and Zacks Rank when it comes to freshness. When you look at the ABR, it may not be up-to-date. Nonetheless, since brokerage analysts constantly revise their earnings estimates to reflect changing business trends, and their actions get reflected in the Zacks Rank quickly enough, it is always timely in predicting future stock prices.

Is ANF a Good Investment?

Looking at the earnings estimate revisions for Abercrombie, the Zacks Consensus Estimate for the current year has increased 0.2% over the past month to $10.29.

Analysts' growing optimism over the company's earnings prospects, as indicated by strong agreement among them in revising EPS estimates higher, could be a legitimate reason for the stock to soar in the near term.

The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #1 (Strong Buy) for Abercrombie. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here

Therefore, the Buy-equivalent ABR for Abercrombie may serve as a useful guide for investors.

Zacks Investment Research

Shares of Deckers Outdoor Corporation DECK have experienced a surge over the past year. The stock has rallied 69%, comfortably outpacing the Zacks Retail-Apparel and Shoes industry’s modest 25.3% growth. The company’s impressive growth can be attributed to its strategic emphasis on expanding brand presence and strengthening direct-to-consumer (DTC) channels.

The company’s commitment to innovation in product development and a strong focus on international market expansion have enabled it to outperform both the broader Retail-Wholesale sector and the S&P 500 index, which grew 35.8% and 36%, respectively, during the same period. Closing at $177.08 on yesterday, DECK stock is moving toward its 52-week high of $184.48 attained on June 3, 2024.

Deckers has shown solid upward momentum, currently trading above both its 200-day and 50-day simple moving averages (SMA), which are key indicators of price stability and long-term bullish trends. In yesterday’s trading session, DECK surpassed its 200-day SMA of $153.16 and 50-day SMA of $158.57. This technical strength, coupled with continued momentum, signals positive market sentiment and growing investor confidence in DECK's financial health and growth potential.

Wolverine World Wide, Inc.’s WWW shares reached a new 52-week high of $22.60 yesterday before closing at $22.31. So far, WWW stock has rallied 151% against the Zacks Shoes and Retail Apparel industry’s sharp 16.6% decline.

The company’s ongoing strategic approach and product diversification have enabled it to outperform the broader Zacks Consumer Discretionary sector and the S&P 500 index’s growth of 10% and 26.1%, respectively, during the same period.

Moreover, the company has shown solid upward momentum, currently trading above both its 200-day and 50-day simple moving averages (SMA), key indicators of price stability and long-term bullish trends. In yesterday’s trading session, WWW surpassed its 200-day SMA of $12.70 and 50-day SMA of $16.12. This technical strength, coupled with continued momentum, signals positive market sentiment and growing investor confidence in WWW's financial health and growth potential.