ANF Abercrombie and Fitch Co

We have maintained our long-term 'Neutral' recommendation on Abercrombie & Fitch Company (ANF) with a target price of $73.00 per share. Moreover, the company has a Zacks #3 Rank, implying a short-term 'Hold' rating on the stock.

Headquartered in Albany, Ohio, Abercrombie operates as a specialty retailer of premium, high quality casual apparels for men, women, and kids through a network of 1,069 stores across the U.S., Canada and Europe.The company has a strong portfolio of well-established brands, each of which is focused on the unique characteristics and rapidly changing preferences of its target customers.

Moreover, Abercrombie is focused toward increasing its presence in international markets in order to drive top-line growth. During fiscal 2011, the company plans to open new stores in Paris, Madrid, Dusseldorf, Brussels, Dublin and Singapore under its Abercrombie & Fitch flagship stores. Apart from this, the company has planned to open 40 international mall-based Hollister stores. Consequently, this provides a strong upside potential to the company.

Furthermore, in an effort to improve cash flow and enhance management’s focus toward core brands, the company has terminated its entire chain of underperforming RUEHL branded stores and associated direct-to-consumer operations. This is expected to increase its long-term profitability. Currently, the company has a solid balance sheet with cash and cash equivalents of $741.8 million and long-term debt of only $69.9 million at the end of the first quarter of fiscal 2011. This offers Abercrombie financial flexibility to drive future growth.

However, Abercrombie does not own or operate any manufacturing facility and therefore purchases all its merchandise requirements from independent third parties. The company's operations may be adversely affected if these manufacturers are not able to ship orders in a timely manner or meet the company’s quality standards.

In addition, Abercrombie's business is seasonal in nature and generates a high proportion of sales during the third and fourth quarters, which are characterized by the back-to-school and holiday seasons. Furthermore, the company ramps up its merchandise levels in anticipation of the holiday season, exposing the company to significant risks, if the season fails to deliver expected operating performance.

Above all, Abercrombie operates in a highly fragmented market and competes with national as well as regional players. Furthermore, apart from competing with larger retailers such as Gap Inc. (GPS), Abercrombie is facing increasing competition from value-priced specialty retailers such as Aeropostale Inc. (ARO) and Buckle Inc. (BKE).

 
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