Abercrombie Stays at Neutral

Zacks Equity Research

We are maintaining our long-term Neutral recommendation on Abercrombie & Fitch Company (NYSE:ANF - News) with a target price of $48.00. Moreover, the company has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

Abercrombie, one of the leading specialty retailers of premium casual apparels in the U.S., has a strong portfolio of well-established brands. Each of these brands is focused on the unique characteristics and rapidly changing preferences of its target customers.

In an effort to improve cash flow and enhance management’s focus toward core brands, the company has terminated its entire chain of underperforming RUEHL branded stores and associated direct-to-consumer operations. This is expected to increase its long-term profitability.

Abercrombie is focused on increasing its presence in international markets as a means to drive top-line growth. During fiscal 2011, the company plans to open stores in Paris, Madrid, Dusseldorf, Brussels, Dublin and Singapore under its Abercrombie & Fitch flagship chain. Apart from this, the company intends to open 40 international mall-based Hollister stores, providing a strong upside potential to the company.

However, Abercrombie does not own or operate any manufacturing facility and therefore purchases all its merchandise requirements from outside. The company’s operation may be adversely affected if these manufacturers are not able to ship orders on time or meet its standards.

In addition, Abercrombie’s business is seasonal in nature and generates a high proportion of sales during the fiscal third and fourth quarters, which are characterized by the back-to-school and holiday seasons. Furthermore, the company ramps up its merchandise levels in anticipation of the holiday season, exposing itself to significant risks, if the season fails to deliver encouraging results.

Above all, Abercrombie operates in a highly fragmented market and competes with national as well as regional players. Furthermore, apart from larger retailers such as Gap Inc. (NYSE:GPS - News), Abercrombie is facing increasing competition from value-priced specialty retailers such as Aeropostale Inc. (NYSE:ARO - News) and Buckle Inc. (NYSE:BKE - News).

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