Thursday, February 11, 2010

Abercrombie & Fitch (NYSE:ANF): ANF today feels like Chico's (CHS) in late 2008, Upgrade to OP - Oppenheimer

Oppenheimer is out rather positive on Abercrombie & Fitch (NYSE:ANF) upgrading the name to Outperform from Peer Perform with a $46 tgt (prev. unch).

While January's sales results benefited from several one-time items, they believe there are hints of stabilization in the domestic business and these brands are not dead. In their view, several catalysts exist for ANF, including 1) 4Q earnings call next week, 2) very easy sales and margin comparisons, 3) growing (and highly profitable) international business and 4) potential for store closings at both A&F and Hollister. Yes, it is a leap of faith to believe that the domestic business can show some signs of life. However, they believe ANF represents one of the most compelling risk/reward opportunities in specialty retail and, accordingly, they are upgrading the stock to Outperform from Perform with a $46 price target.

Easiest Compares in Retail and Potential/Hope that January was more than just a “Blip”
Though the firm acknowledges easy compares do not make good comps alone, they cannot help but point out just how easy ANF’s compares are for the rest of 2010. ANF has underperformed the specialty retail average for almost three years now, which may create an opportunity in 2010 and beyond. Although gift cards helped spur sales in January, the Winter Clearance event also played a good part. Oppenheimer does not think the brand is dead and should the company properly align its pricing strategy, their think a sequential improvement in comps is possible. Their model assumes down mid-single digit comps in 2010.

Store Closures Could Provide Substantial Comp and EBIT Lift
A potential upcoming positive catalyst is the announcment of store closures on the company’s 4Q09 conference call. Though there will be one-time costs involved, Oppenheimer thinks that the majority of these closings are locations that are losing money and there could be a substantial comp and EBIT lft. To gain a better perspective of what these store closings could mean to numbers, they take a look at Chico’s from a year ago.

ANF today feels like Chico's (CHS) in late 2008. From 2006 to 2008 sales/ per square foot at the Chico’s core brand decreased from $1,028 to $598. Similarly from 2007 to 2009E the same metric at ANF declined from $535 to $375. In 2008, CHS gross margins dropped anywhere from 330 basis points to 580 basis points compounded by comps in the negative 13.0% to 17.5% range. In their analysis, Oppenheimer assume ANF will make an imminent announcement about store closures and expense reductions.

In the charts below the firm has identified time period “0” as the period where CHS made a similar announcement to reduce expenses and shutter underperforming doors (1/29/2009). In the four quarters prior to this announcement, CHS comped down double digits and gross margins decreased between 200 and 600 bps per quarter. However, in the three quarters post-announcement, CHS’s comps and gross margin increased sequentially. The stock price has increased almost 250% (vs. S&P up ~27%, peer group up 76%) since the announcement and was down almost 58% in the year prior to the announcement (vs. S&P down 38%, peer group down 33%).

Oppenheimer views ANF's 4Q earnings on 2/16 as a potential positive catalyst for the stock as 1) it is likely that domestic store closures are announced, 2) the company will give additional details regarding international performance, and 3) discussion around the U.S. business will focus on lower prices.

Based on their sum-of-the-parts analysis, the U.S. business is currently trading at just 0.1x EV/sales, a 90% discount to the group at 0.9x even with trough margins. CHS traded from 0.2x sales to roughly 1.1x in just 9 months after showing sequential comp improvement and then +comps in 2H09.

Notablecalls: Interesting call on Opco's part. Retail has become so hated, it almost looks good for a buy.

But not yet, not yet...

ANF is going to trade up 1pt+ on this call, I suspect. I'm not going to chase it here though..maybe as a bounce play if/when it gets crushed along with the mkt.


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