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Concerns Ease As Abercrombie & Fitch Upgraded By Bank Of America

Alex Cho

On Thursday, Bank of America Merrill Lynch raised its price target and rating on Abercrombie & Fitch (NASDAQ: ANF).

However, shares are sliding and have declined by 1.97 percent on the Thursday session, despite the well-presented investment thesis by the Bank of America analyst.

Broader weakness in equity sentiment is likely the driver as the S&P 500 is currently down by 1.35 percent in Thursday trading.

Bank of America Merrill Lynch upgrades Abercrombie & Fitch from Underperform to Neutral:

“We think Abercrombie's assortment has begun to improve, and is a good first step toward adapting to the changing female consumer. With sequentially improving comps and fashion, we see less risk. The international business remains more profitable than the domestic business and mix shift towards it and DTC, plus cost cutting, should help stabilize margins. However, headwinds remain for domestic teen retailers, including heightened competition and a weak fashion cycle.”

Bank of America Merrill Lynch mentioned that the good outweighs the bad, because of better year-over-year comps and better assortment. The firm also anticipates less risk, as a result, which helps to give it a premium valuation when compared to peers. However, lingering risks keep Bank of America from upgrading to Buy at this time.

Bank of America Merrill Lynch raised its price target from $33 to $42:

“Our price objective of $42 is based on a 17x P/E using our F2015 EPS estimate. This P/E is at a slight premium to the specialty retail group average. We think a slight premium multiple is warranted as Abercrombie's improved assortment should be a positive for traffic and conversion. We still see a number of headwinds for the teen retail segment, but think Abercrombie's product improvement helps balance these risks.”

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