Abercrombie Evenly Poised

We maintain our long-term Neutral recommendation on Abercrombie & Fitch Co. (ANF - Analyst Report). Abercrombie is one of the leading specialty retailers of premium casual apparels in the U.S. 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, in an effort to improve cash flow and enhance management 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.

Furthermore, Abercrombie is focused on increasing its presence in international markets as a means to drive top-line growth. During fiscal 2011, the company plans to open stores in Paris, Madrid, Dusseldorf, Brussels, Dublin and Singapore under its Abercrombie & Fitch flagship chain.

The company plans to open 40 international mall-based Hollister stores. Overseas expansion provides a strong upside potential to the company.

On the flip side, Abercrombie’s business is seasonal in nature and generates a high proportion of sales during the fiscal 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 itself to significant risks, should the season fail to deliver.

Additionally, Abercrombie does not own or operate any manufacturing facility and therefore purchases all its merchandise requirements from outside. The company’s operation may be adversely affected if these manufacturers are not able to ship orders on time or meet its standards.

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

Abercrombie holds a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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