Monday, November 09, 2009

Abercrombie & Fitch (NYSE:ANF): Upgraded to Conviction Buy at Goldman, Outperform at Credit Suisse

Abercrombie & Fitch (NYSE:ANF) is getting two upgrades this morning:

- Goldman Sachs upgrades ANF to Conviction Buy List from Neutral with a 6-month price target of $45.

According to the analyst they view the story as increasingly attractive within the context of their investment framework, given a combination of: 1) Significant longer-term growth drivers: Accelerating international store openings have the potential to almost double EPS in 2010 due to the much higher productivity and profitability of these stores; Goldman sees ample room for more international openings in 2011 and beyond; and 2) Company specific drivers for improving sales trends in existing stores, including a more vocal value message (which is starting to help traffic) and returning tourist visitation to the US.

ANF shares are 58% off their two year high vs. an average of only 25% for Goldman's apparel retail coverage. While the international profit opportunity has been part of the bull case for some time, they see it as a bigger catalyst for shares in the coming quarters as the pace of openings is accelerating notably vs. last 12 months and domestic profit erosion should be much less of an offset thanks to drivers noted above. Goldman expects ANF’s stock to react favorably to improving sales trends in coming months and upside to EPS in 4Q and beyond. Assuming higher sales, they raise their new 2009/2010/2011 EPS forecasts to $1.11/2.02/2.67 from $0.99/$1.91/$2.49; new estimates average 22% above consensus.

ANF’s more vocal value message is now starting to close the gap on traffic
Goldman's analysis of ANF’s transaction trends vs. peers highlights the severe relative traffic loss ANF experienced over the past four quarters as peers promoted aggressively. It also shows the relative improvement in transactions ANF has seen in recent months as they have become more vocal on value.

- Credit Suisse is upgrading ANF to Outperform from Neutral with a $49 price target (prev. $30) after increasing their F09E from $1.11 to $1.30 and their F10E from $2.00 to $2.17 based on higher than anticipated flagship and international Hollister stores’ revenue/margin contribution. ANF reported an in-line October comp of (15)% on Thursday, but new space productivity came in higher than expected, driven by international Hollister stores, the Milan flagship opening and e-commerce. This gives the firm greater confidence that the company can beat earnings expectations in 3Q09, 4Q09 and F10.

There are three key points to CSFB's upgrade: 1) While they have always thought the market underappreciated the near term international impact, the increasing spread between total sales growth and comps indicates international Hollister locations and the SoHo and Milan flagships are driving even higher revenues than we previously estimated, and the Tokyo flagship is not even open yet, 2) CSFB believes the combination of Ruehl closing and incremental revenues from F09/F10 flagship and international Hollister openings will drive $1.14 in incremental EPS in F10, and 3) Their estimates do not assume any turnaround in the U.S. business, although recent months give them more comfort that stabilization in F10 is likely.

Catalysts: CSFB believes ANF will beat 3Q09 EPS, to be reported this Friday (they are at $0.22 vs. cons. of $0.20), and upside to 4Q09 will become more clear (they are at $1.34 vs. cons of $1.01), driven by international strength.

Notablecalls: The shorts (15% short interest in the name) must be sweating bullets here.

Not only is CSFB out with a new Street high target on the name but Goldman Sachs is blessing the stock with their Conviction Buy rating. It can't get much worse from here for the shorts.

Note that CSFB is calling for a better-than-expected quarter this Friday, which will serve as a catalyst for the shares.

Barron's was out negative on ANF last Friday. Think that sucked in some more shorts.

So, the ingredients of major short squeeze seem to be in place. I'm guessing ANF will trade toward the $37-37.50 range today.

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