Abercrombie & Fitch (NYSE:ANF): Fear & Loathing in..London; target to $75 (!) - Jefferies

Jefferies is making an interesting out-of-consensus call on Abercrombie & Fitch (NYSE:ANF) raising their price target on the name to a new Street high of $75 (prev. $50) and reiterating their Buy rating.

Firm notes they hosted ANF mgmt for meetings in London on April 8-9. Meetings suggest U.S. biz is on a solid path of improvement while the int'l piece is a very sizable and "now" catalyst. They think Street '10/'11 EPS ests. are way too low, sentiment still too negative, and stock risk/reward still exceptional (upside >50% / downside <10%).

Key Points

- Convinced The U.S. Turn Is Here. Comps have turned positive, product is improved, and prices are more affordable giving consumers a reason to come back to the brands. The Adult/Kid businesses should see the strongest momentum near-term while Hollister trends should improve by mid-year.

- See Int'l Near 25% of Sales / 50% of Profits in '11. International is a home run and should continue to be the sales growth driver as well as the primary earnings engine while the U.S. business slowly exits the trough. The international growth and profit potential is one of the most attractive in retail, in their view.

- Now Even More Bullish On Earnings Power. Management's set goal of returning to "at least 15%" operating margins by 2012 looks like it can happen in 2011. Jeffco holds this more bullish view given improving U.S. comp trends, accelerating international growth, gross margins which look like they are about to turn back up in 2H'10, and sizable cost savings opportunities from closing stores in the U.S. As such we are raising our 2011 EPS by $1 to $3.75.

- Expect Bears to Continue Capitulating. The ratings distribution remains overly neutral on ANF with general sentiment still very skeptical. Firm continues to believe that the domestic business is in the beginning of a cyclical recovery and that the international opportunity is more powerful than many estimate. Near-term, they see improving monthly comps as a catalyst to drive shares higher.

- Call Jeffco For Trip Highlights. Firm says they learned why management is confident around its 15% operating margin goal for 2012, the process and thinking around store closures, and even discussed potential uses of excess cash.

Jeffco's new $75 PT is based on 22x 2011 P/E and 7x EV/EBITDA (recovery multiples), a slight premium to historic averages. They also factor in their work that suggests the international biz could be worth near $30. Risks to PT include a re-acceleration in sales declines.

Notablecalls: This must have been one hell of a trip Randy Konik & his team had in London. I mean, clients have to call in (!) to get the highlights. This stuff is probably not for the eyes and ears of women & children.

I can't wait to hear the details!

Now, for the call..

The stock has been a bit of a short crusher of late. Co posted the worst comp. numbers in the teen sector last week, the stock gapped down 2pts in reaction and then rallied 4pts+. Short interest stands around 15%, and the analyst community is skeptical as ever.

Even Barron's is out cautious on the name today:
http://www.reuters.com/article/idUSN1111384520100411

Jeffco's track record with ANF is actually rather admirable - they managed to upgrade the name back in May '09 with a 50% price target (which sounded somewhat bizarre to everyone) & have been upping it ever since then. The point being, they were right.

As many of you know, I'm bit of a junkie for these out-of-consensus calls, so I think this one's a keeper here.

There could be several points worth of upside there, if the market holds. I'm guessing $52's.

Look at what they did to Columbia (COLM) on Friday, after Barclays slapped a 50% target on the name.