Focus Shifts Definitively to Growth; Raising Target to $76 - Abercrombie & Fitch Co. (ANF)

Abercrombie & Fitch Co. (ANF)

Our Take — ANF delivered a remarkably strong setup for 2011/2012 at its analyst day. They tabled the margin concerns by moving to an EPS target and assuaged the bulls with a $4.75 earnings goal for 2012. We see ample levers to drive earnings. The $4.75 EPS target for 2012 illustrates a more robust track for international. We estimate an international penetration rate of 30% in 2011 from under 20% in 2010. Unit growth is accelerating in both 2011 (45 units) and further in 2012 (50 units) from 19 new units in 2010; margins are targeted at 30% on a four wall basis. We are raising our target to $76; 16x $4.75 in 2012 and remain buyers here despite today's move.

Sales to Double by 2015 — Management reinforced the growth message with a path to add nearly $4 billion in revenues through international and e-commerce. ANF sees $7.5 billion in sales in 2015, double the level in 2010, with a 50% penetration rate for international.

International Track Clearly Accretive — ANF outlined a target of $1.25 billion in sales from international A&F stores and $1.5 billion for international Hollister stores with 185 stores ($8MM per store). That assumes deceleration in sales per store trends.

Domestic Productivity Targeted at 90% of 2007 Levels — ANF raised its expectations for domestic productivity in 2012 to 90% of 2007 levels (from 85% previously). That equates to roughly $467 in sales per square foot. Longer term, the company thinks they can achieve productivity in-line with 2007 levels, at $519. That is expected to be driven primarily by comps with continued execution on the product side. Longer Term Goal of $1 Billion in DTC Sales — Management laid out a target of $1 billion in DTC sales over the next few years; direct sales in 2010 were $353 million. Direct margins are closer to 50%, excluding ongoing investments in the division.