Business / Abercrombie&Amp;Fitch Financial Analysis

Abercrombie&Amp;Fitch Financial Analysis

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Autor:  anton  17 April 2011
Tags:  Abercrombiefitch,  Financial,  Analysis
Words: 1293   |   Pages: 6
Views: 626

ACCOUNTING 6000

FINANCIAL PAPER ANALYSIS

Introduction:

The structure of the paper will be as follows: First, the purpose and objectives of the fnancial analysis will be streched out, and the target audience will be identified. Second, an initial review of the company that will be taken into consideration, “ABERCROMBIE & FITCH” will be conducted. Third, horizontal and vertical analyses with the help of the three major financial statements of the Abercrombie&Fitch Annual Report (Income Statement, Balance Sheet, and Statement of Cash Flows) will be conducted. Unusual trends will be identified. Additionally, ratios for the financial statemenst will be classified into four broad groupings, based on the characteristics that particular ratios are intended to measure. These groupings are (1) liquidity, (2) profitability, (3) capital structure, and (4) investor ratios. Finally, the ratio results will be reviewed and examined before giving a recommendation and final statement.

Focus:

The “Stern”, which is the biggest news-magazine in Germany, published an article about Abercrombie&Fitch, the popular US-American clothing chain, this summer, mentioning the success and expansion plans of this company. This brought to mind the idea of analyzing Abercrombie&Fitch, supposing to be a potential investor, who would like to buy Abercrombie&Fitch stock. So, before making a final decision the financial statement analysis will help to support the author’s decision at this point of time.

Initial Review:

Abercrombie&Fitch, through its subsidiaries, operates as a specialty retailer in the United States and Canada. Its stores sell casual apparel under the Abercrombie & Fitch, abercrombie, Hollister, and RUEHL brands. As of April 1, 2006, it operated 850 stores in 49 states, the District of Columbia, and Canada. The company was founded in 1892 and is headquartered in New Albany, Ohio. Abercrombie&Fitch employs about 6,900 people in the United Staes and Canada., having a market capitalization of $ 6.07 billion.

Analysis of the three primary statements:

As being a potential investor, a financial statement analysis is needed in order to help decide whether to increase or decrease ownership interests in the firm. The decisions are based on projections of investments risks and returns. All the numbers are calculated in thousands.

Liquidity ratios: These selected ratios indicate short term solvency of the firm, and also how effectively the firm is managing its working capital.

• Current ratio = Current Assets / Current Liabilities = $947084 / $ 491554 = 1.93

• Quick ratio = Monetary Current Assets/ Current Liabilities = (Current Assets –

Inventories) / Current Liabilities

= ($ 947084 - $ 362536) / $ 491554 = 1.19

• Number of days’ sales in inventory = Ending Inventory / Cost of Goods Sold per Day = $ 146341 / ($933295 / 365) = 57.23 days

Profitability Ratios: they are the second major focus of analysis for any investor. Without profits there will be no return to the investor or no one will want to invest.

• Gross profit margin = Gross Profit / Net Sales Revenue = $ 1851416 / $ 2784711

= 66.49 %

• Operating Income Ratio = Operating Income / Net Sales Revenue = $542738 / $2784711

= 19.49 % (End of 2005)

= 17.20 % (End of 2004)

• ROE = Net Income / Av. Shareholder’s Equity = $ 333986 / (($669326 + $ 995117)/2)

= 40.13 %

• Quality of income = Cash Flow from Op. Activities / Net Income = $ 453590 / $ 333986

= 1.34%

Capital structure: these calculations assess the firm’s strategies for financing its assets and indicates the relative amounts of debt and equity capital.

• Percentage composition: All sources of capital must add up to 100%.

o Current Liabilities / Total Liabilities + Shareholder Equity

= $ 491554 / $ 1789718 = 24.47 %

o Deferred taxes and other similar liabilities / Total Liabilities + S.h. Equity

= $ 303047 / $ 1789718 = 16.93 %

o Shareholder’s Equity / Total Liabilities + Shareholder’s Equity

= $ 38496 / $ 1789718 = 2.15 %

o Long-Term Debt / Total Liabilities + Shareholder’s Equity

= $ 995117 / $ 1789718 = 55.6 %

 24.47 % + 16.93 % + 2.15 % + 55.60 % = 99.2 %

• Financial leverage = Total Liabilities / Total Assets

= ($ 491554 + $ 303047) / $ 1789718 = 0.444 = 44.4 %

Investor ratios: all relate to an external dimension of ownership interest. Helps to indicate how Abercrombie&Fitch is performing with regard to the market value of its shares.

• Earnings p. Share = Net Income / Weighed Average Number of Shares Outstanding

= $ 333986 / ((87161+91221)/2) = 3.745

• Price to Earnings (P/E) = Market Price per Share / Earnings per Share

= 70.58 $ / 3.745 = 18.85

Results and Interpretation of the Calculations:

The “current ratio” of 1.93, meaning that there are almost twice as many assets as there are liabilities, indicates Abercrombie&Fitch’s ability to meet short-term debt obligations. This ratio is relatively high, meaning that the company is very liquid and considered as having good short-term financial strength. A “quick ratio” of 1.19 is also indicating strong short-term liquidity, meaning that the company can repay current liabilities without relying on the sale of inventory. “Number of days’ sales in inventory” of only 57 days means, that inventory changes frequently, especially since Abercrombie&Fitch is a clothing company. This high turnover rate can generally be viewed at positively.

“The gross profit margin” tells us as potential investors the percentage of revenue / sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled. So, with a Gross Profit Margin of 66.49 % Abercrombie&Fitch beats all its direct competitors like GAP (35.42 %) , American Eagle (46.86 %) and J Crew (41.82 %). Furthermore, the “Operating Income” states that Abercrombie&Fitch Co.’s operating income grew from 17.2 % at the end of 2004 to 19.5 % at the end of 2005. The “Return on Equity” of 40.13 % reveals how much profit Abercrombie&Fitch earned in comparison to the total amount of shareholder equity found on the balance sheet. Again, this number is very high compared to its competitors American Eagle (26.07 %), GAP (17.26 %), and the industry (36.68 %). Moreover, the “Quality of Income” ratio of 1.34 is a significant and important ratio for showing Abercrombie&Fitch’s profitability, since it shows an increasing CFOA compared to Net Income. Increasing or stable levels of operating income indicate sustainability of the firm’s profits.

The “Financial Leverage” of 0.444 means, that each 100 % change in EBIT will result in a 44 % change in EPS. This means that Abercrombie&Fitch is not highly leveraged, therefore are not at the risk of bankrupcy.

Abercrombie&Fitch’s “Earnings per Share”, again, distinguish the company from its competitors. With EPS of 3.745 this measurement of corporate value lays way above GAP (1.065), American Eagle (2.072), J Crew (-0.283), and the industry average (1.33). Finally, Abercrombie&Fitch’s high “Price to Earnings” of 18.85 in general suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. Abercrombie’s competitor’s show P/E ratios of 21.29 (American Eagle) and 17.34 (GAP). So, in this segment, Abercrombie does not diestinguish itself from the competition.

Integrated Conclusions and Recommendation:

The conclusion based on the previous analysis, shows that Abercrombie&Fitch Co. is a healthy company, that distinguishes itself from the competition regarding liquidity, profitability, value, and performance. Abercrombie&Fitch proves to be liquid, profitable, and far away from bancrupcy. This should and probably will attract potential investors in the future. Furthermore, if we take into consideration the company’s current performance compared to it’s previous years it becomes obvious that the company has increased its performance drastically.

To sum up this financial analysis of Abercrombie&Fitch, investing money in Abercrombie&Fitch stock definitely

is highly recommended and for sure a good choice.



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