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On Aug 28, we downgraded our recommendation on specialty retailer Abercrombie & Fitch Co. (ANF - Analyst Report) to Underperform based on the company’s dismal second-quarter fiscal 2013 results.

Why the Downgrade?

Estimates for Abercrombie have been declining ever since it reported second-quarter results on Aug 22. Abercrombie’s revenues as well as earnings per share of $945.7 million and 16 cents missed the Zacks Consensus Estimates of $998 million and 28 cents, respectively.

Following the results, the Zacks Consensus Estimates for fiscal 2013 and 2014 fell 30.8% and 18.7% to $2.22 and $3.22, respectively. With the Zacks Consensus Estimates for both 2013 and 2014 going down, the company now has a Zacks Rank #5 (Strong Sell).

Causes of Concern

Negative comparable store sales remain a major concern for Abercrombie. The company’s comps performance depicts a downward trend, with disappointing results for the trailing 6 quarters. Moreover, Abercrombie is expecting comps to fall marginally in fiscal 2013.

Based on assumption of lower comps in the third quarter, Abercrombie projected third-quarter 2013 earnings guidance range to be 40-45 cents per share. Given the aforementioned facts, we remain apprehensive about the company’s future comps performance.

Moreover, there are challenges on the macroeconomic front. The apparel retail industry is consumer-driven and hence, very sensitive to the health of the economy. Spending on apparel and accessories is heavily dependent on the personal disposable income of consumers. The current macroeconomic challenges, such as high household debt and unemployment may restrain consumers’ spending on these items.

Given the second-quarter performance and Abercrombie’s conservative outlook, we do not see any significant catalyst that could drive the shares in the near term. With the company failing to provide any guidance beyond the third quarter due to lower traffic, the Zacks Consensus Estimate for the third quarter has fallen 55.7% to 47 cents.

Other Retail Stocks Worth Consideration

While we prefer to avoid Abercrombie until signs of improvement in the company's performance, other retail stocks worth a look include Green Mountain Coffee Roasters, Inc. (GMCR - Analyst Report), Citi Trends, Inc. (CTRN - Analyst Report) and PCM, Inc. (PCMI). All these carry a Zacks Rank #1 (Strong Buy).

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