Is Abercrombie & Fitch Back In Fashion With The Street?

Abercrombie & Fitch Co. ANF reported fourth-quarter results that sent the stock soaring on Wednesday. The parent company of Hollister and Abercrombie stores reported a top-and-bottom line beat and better than expected comps.

The Analysts

• Wedbush's Jen Redding maintains a Neutral rating on Abercrombie & Fitch with a price target lifted from $19 to $23.
• Baird Equity Research's Mark Altschwager maintains at Neutral, price target lifted from $22 to $25.
• RBC Capital Markets' Kate Fitzsimons maintains at Sector Perform, price target lifted from $24 to $27.

Wedbush: Healthy Growth

Abercrombie reported a "sizable" beat on the bottom line as the company is taking advantage of healthy growth, Redding said in a research report. Some of the highlights include:

• 20 basis point gross margin expansion or 70 basis points not including foreign exchange;
• Same-store sales of 3 percent beat expectations of 1.4 percent;
• The Hollister brand showed a "strong" 6 percent comp growth on top of last year's 11 percent growth;
• Merchandise margin exceeded expectations even when factoring in an increase in promotional activity; and
• Management guided to a "strong" first quarter despite a "lackluster" start for the retail sector.

Despite encouraging metrics that affirms a turnaround path is underway, the research firm needs confirmation of an inflection in the brand's data to "take shares to the next level."

Baird: Solid Playbook But Valuation Concerns

Abercrombie's "playbook" is four-fold, Altschwager said in a research report. These include:

1. A plan to speed up investments in new store experiences in 2019 versus 2018.
2. Expand digital sales, which hit the $1 billion mark in 2018.
3. Improve efficiency, speed and data analytic capabilities.
4. Focus on customer engagement and loyalty programs.

The analyst said the playbook is backed by a strong management team that can also leverage Hollister's recent success at the core brand. The stock's valuation offers a balanced risk-reward profile given a slowing macro environment.

RBC: Progress Towards 2020 Targets

Abercombie's 2019 guidance of low-single-digit comp growth implies the company continues to progress towards its 2020 target of 5.8 percent EBIT margin, Fitzsimons said in a research report. There is some "pushback" towards these goals from international markets, however, which are soft and could derail the 2020 target.

The company said domestic productivity gains in the U.S., which accounted for 65 percent of sales in 2018, could help boost margins higher. So long as the international business shows signs of being soft, Fitzsimons said the stock's multiple "is unlikely to get much credit."

Price Action

Shares of Abercrombie & Fitch traded at $25.69 Thursday afternoon.

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Photo credit: Phillip Pessar, Flickr