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We retained our Neutral stance on Abercrombie & Fitch Co. (ANF - Analyst Report) on the back of robust third-quarter 2012 results and an upbeat outlook, offset by concerns regarding declining comparable-store sales (comps) trends. However, the company holds a Zacks Rank #2 (Buy).

Why Neutral?

Driven by strong top-line growth coupled with improved margins and lower tax rate, Abercrombie’s third-quarter 2012 earnings surged over 52% to 87 cents per share and surpassed the Zacks Consensus Estimate of 59 cents. Total sales went up 9% to $1,170 million and beat the Zacks Consensus Estimate of $1,115 million.

Based on strong quarterly performance, Abercrombie raised its earnings guidance for fiscal 2012 to $2.85 – $3.00 per share, from its earlier guidance range of $2.50 – $2.75.

This premium casual apparel retailer has to its credit 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, with its unique and sexually-explicit advertising strategy, the company’s apparels are a major attraction for its target customers.

Additionally, we believe the company’s recent shift in focus towards closing underperforming stores in the U.S. and accelerating expansion in international markets, should help boost top-line growth as well as enhance profitability. Abercrombie has planned to open a total of 20 Hollister stores internationally in 2013.

However, despite the solid quarterly result and upbeat outlook, our long-term Neutral view on Abercrombie is guided by apprehensions regarding its declining comps, which continue to weigh upon its performance. Further, we believe that the company’s over-dependence on outside suppliers, intense competition from discount retailers as well as seasonality of business may undermine its growth prospects.

Other Stocks to Consider

Besides Abercrombie, other stocks to consider in the specialty retail sector are American Eagle Outfitters Inc. (AEO - Analyst Report), Chico’s FAS Inc. (CHS - Snapshot Report) and Gap Inc. (GPS - Analyst Report). These companies carry a Zacks Rank #2 (Buy).

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