Tuesday, May 04, 2010

Abercrombie & Fitch (NYSE:ANF): International Upside, U.S. Recovery, & Store Closures Under-Appreciated - Morgan Stanley

Morgan Stanley is upgrading Abercrombie & Fitch (NYSE:ANF) to Overweight from Equal-Weight and is establishing a price target of $56.

They believe the market is under-appreciating the sales, earnings, and margin upside over the next several years from int’l growth, improvement in domestic productivity and the benefit of U.S. store rationalization. MSCO new 2012 EPS forecast of $4.37 compares to the Street’s $3.28. Morgan Stanley estimates domestic and int’l EPS of $2.25 and $1.97 in 2012, respectively, to which they apply 13x and 20x multiples based on a set of global retail peers. Net cash of ~$640M (16% of market cap) further supports shares.

International Expansion: They leverage their bottom-up int’l store model to estimate the revenue potential of ANF’s int’l business. Firm forecasts ~$1Bn of sales in 2012 (28% of sales) vs. $363M in 2009 (12% of sales). Moreover, MSCO work suggests ANF int’l can achieve EBIT margins of 22% w/in 3 years (vs. MS estimate of 17.5% in ‘09). They attribute $31 of value to the segment.

Domestic Improvement: Importantly, they expect ANF's domestic business to deliver improved sales productivity over the next 3 years even in the absence of further macro recovery — helped by improved merchandise assortments, lower prices, and company-specific initiatives to drive sales/sq ft higher. They attribute $23 of value to the business assuming margins return to 11.5% in 2012 from ~3% in 2009, still well below peak of 24%.

U.S. Store Rationalization: Recent meetings with management confirm MSCO belief that ANF will aggressively close underperforming stores in the US. Their base case conservatively assumes 50 closures in each of 2011/2012, which they expect to contribute at least $0.15 of EPS upside each year and $2 of value.

Notablecalls: Looks like Morgan Stanley Retail team has warmed up to ANF as well. Given the fact I have been wrong on the name recently (see archives), I don't have much conviction on the long side here but I thought to highlight the call.

The stock is likely to trade above the $45 level but it remains to be seen how much conviction the buyers have given the state of general market this morning.

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