Goldman Sachs: Retail Headed For A Comeback (ANF, AEO)

In a recent report, Goldman Sachs added Buy-rated Abercrombie & Fitch ANF to the Conviction List and upgraded American Eagle AEO from Neutral to Buy. Goldman identified drivers/signals that suggest multi-yr macro and trend cycle headwinds are shifting to tailwinds for ANF & AEO. Teen unemployment is improving from record highs and signs suggest trends that hurt classic brands like AEO/ANF are fading; and ANF/AEO's more fashion impacted women's business is starting to improve. These drivers have potential to drive major upside: ANF/AEO's gross profit/ft is >25% below prior peaks, and when macro/trend headwinds shifted to tailwinds in 2004 gross profit/ft went from similarly depressed levels to above prior peaks in only 2-3 years; This upside potential is significantly underappreciated by the market. Consensus does not factor in any notable US gross profit/ft recovery for either ANF or AEO, and both stocks are trading at modest multiples against depressed EPS expectations. Price declines are stabilizing for AEO/ANF in the last 6 months even as gains for the sector level off and ARO promotions get deeper. A combination of undervalued international growth and underappreciated domestic recovery makes ANF Goldman's favorite apparel idea. ANF closed at $51.43 AEO closed at $14.86