Friday, September 04, 2009

Abercrombie & Fitch Co (NYSE:ANF): Downgraded to Sell at Citigroup; $24 price target - Negative Earnings Revisions Likely Ahead

Citigroup is out downgrading Abercrombie & Fitch Co (NYSE:ANF) to Sell from Hold while lowering their price target to $24 (prev. $33).

Firm notes they lower their rating to Sell as they believe that ANF will continue to experience deteriorating same-store sales due to problems beyond pricing & newness as ANF’s proactive promotional stance during back-to-school shopping season is not supporting improved sales productivity. Sales shortfalls will likely lead to continued negative EPS revisions. They are also incrementally concerned due to Aug. weakness in key back-to-school items, i.e. graphic Ts, knit tops, & denim, which does not bode well for 2H09 & expect 3Q09 comps of (22)-(24)%. ANF’s Aug. comp was -29% (vs. -30% in 1Q09 & 2Q09) despite 4 point easier comparison in Aug.

In firm's view, sales shortfalls at ANF will likely lead to continued negative EPS revisions. They acknowledge that ANF’s overall comparisons become 3 points easier in September and 13 points easier on a 2 year basis; however, they believe comps are likely to continue in ~-20% range as less bad traffic may not offset lower average unit retail price (higher promotions).

Lowering EPS Estimates and Target Price — Citigroup is lowering their 3Q EPS est. to $(0.01) from $0.18 on a (22)-(24)% comp, gross margin -270bps, and SG&A dollars of $466mm. Their new 4Q EPS estimate is $0.98 from $1.15 on a (9)-(11)% comp, gross margin +40bps, and SG&A dollars of $489mm. Target price is lowered to $24 (from $33) on ~16x 2010 EPS est. or ~4x 2010 EBITDA.

Citigroup Thinks Bull Case Is in Their Low Ests — They acknowledge ANF bull case which assumes less bad comps, 4Q/2010 int’l rev. benefits, & tailwinds from RUEHL closing. They believe their EPS outlook adequately incorporates these factors yet new 2H09 EPS est. is $0.97, or 25c below Street’s $1.22. Firm speculates that shuttered windows at ANF concepts could deter traffic. ANF may need more open exposures in addition to lower AUR and new fashion to boost sales.

In Citi's view, ANF is experiencing deteriorating same store sales due to problems beyond pricing and newness as ANF’s proactive promotional stance during the backto- school shopping season does not appear to be driving improved sales results. Female customers in particular may prefer faster fashion and more SKU variety (i.e. Forever 21), and they do not believe ANF is set up for this change in consumer preference.

Problematically Late to Sourcing Revisions — Also, in firm's view, ANF appears late vs. competitors at securing lower product costs as specialty comps (i.e. GPS, AEO, PLCE, URBN, and LTD) are seeing product cost savings in 2H09 or sooner while ANF did not appear to source into lower prices until 1H10. Management indicated it continues to review pricing on an ongoing basis and is reducing AUR but will be most dramatically reducing AUR at Hollister and abercrombie kids.

Notablecalls: This is a fairly strong call from Citigroup's Apparel Retail team. Their new price target for ANF is way below market and that should send shivers across shareholder base.

ANF reported weaker than expected comps yesterday morning and this looks to have triggered the downgrade. I guess Citi had been looking for some improvement but after the miss they decided to throw in the towel.

What to do with the stock? I guess its a short anywhere above the $30 level.

Note there's a 18% short interest in the name so don't expect it go down without a fight.

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