Wednesday, April 14, 2010

Abercrombie & Fitch (NYSE:ANF): ANF story now represents the best of both worlds - Credit Suisse

Credit Suisse is out positive on Abercrombie & Fitch (NYSE:ANF) raising their price target to $63 (prev. $49) and reiterating their Outperform rating.

Firm notes they are increasing their F10E from $1.82 to $2.10 and their F11E from $2.69 to $3.00 to reflect stronger than previously forecast total sales and comps. ANF posted its third consecutive positive comp in March, increasing CSFB's confidence that the turnaround of the U.S. business is gaining traction, which they expect will continue through the rest of F10, especially given the easy comparisons (which get easier as the year goes on). The ANF story now represents the best of both worlds – a domestic turnaround story and a hyper-growth international story.

Catalysts: The next catalyst for the stock will be ANF’s April sales results, to be released on May 6, 2010.

In the near-term, they believe the street is missing the total revenue story for 1Q, and that consensus numbers are too low. Firm notes they already know the actual sales dollars for February and March, so they can solve for what the consensus revenue estimate is for April. Using 1Q consensus revenue of $659.6MM and subtracting the actual sales results from February and March, they calculate April sales consensus at $186.1MM, down 6% vs. April 2009 sales of $199MM, excluding Ruehl. Using the March spread between comps and total sales of 1,400bps, this would imply comps down 20% in April. Truthfully, the firm says, they don’t think anyone is looking for a down 20% comp in April, but rather that many are missing the fact that total sales have grown 11-14% above comp growth over the past two months, which speaks to the strength of ANF’s new fleet of international stores and growing e-commerce business.


CSFB believes no matter what comp ANF reports for April (they estimate down 4-6%), total sales will be an upside surprise vs. consensus numbers. Based on their comp estimate for April, they estimate 1Q10 sales of $687MM vs. consensus of $660MM.

Best of Both Worlds
CSFB believes at this stage of the game ANF offers the best of both worlds in terms of what retail investors should own right now – a domestic turnaround story gaining traction and a hyper-growth international story.

ANF has now posted three consecutive months of positive comps (+8% in January, +5% in February, +5% in March) and they believe that the U.S. business will only continue to gain traction.

They expect ANF’s international business to grow ~86% this year, and represent ~20% of total sales (from 12% in 2009), and continue to grow over the next 5 years, to reach 34% of sales in 2014.

Not to pick on LULU, but most investors consider LULU the best growth story in CSFB universe. However, when one looks at the size and growth of ANF’s international business compared to LULU’s entire business, they would call ANF international the best growth story in CSFB universe (it just happens to be hidden by the mature U.S. store base).

With LULU’s EV at $2.9BN, it trades at a 5x multiple of F10 sales. If ANF international were given the same multiple, the EV of international alone would be $3.4BN (compared to ANF’s actual current EV of $3.7BN). CSFB believes this highlights how the market remains behind the curve in terms of appreciating the ANF international story.

Need to Consider EPS Upside to Understand Valuation
With ANF stock up 35% since March 1st and trading at 19x F11 consensus EPS of $2.52, many are starting to call the stock expensive. That would be true if you believe there is no upside to consensus estimates.

CSFB believes there is upside to both F10 consensus of $1.83 and F11 consensus of $2.52. They estimate much of the upside will come from top-line, as the company achieves not only better (positive) comps but also a larger spread than many are expecting, again driven by international and e-commerce growth. Keep in mind that every comp point (or total sales point) adds ~$0.12 to EPS.

Notablecalls: Another lovely call from Credit Suisse's research team. As many of you noticed, ANF didn't recieve much love on Monday after Jefferies slapped a Street high target of $75 on it.

Now CSFB is playing ketchup and has numbers to back it up.

I'm not saying ANF is an outright buy on this but it's certainly one to watch. If it gets jiggy, buy it. There is momentum in this one.

1 comment:

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