We have maintained our long-term ‘Neutral’ recommendation on Abercrombie & Fitch Company (ANF) with a target price of $56.00 per share. Moreover, the company has a Zacks #3 Rank, implying a short-term ‘Hold’ rating on the stock.
Ohio based, 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. Over the years, the company has extensively relied on its lineup of leading product labels including Abercrombie & Fitch, Hollister and Abercrombie Kids and a unique in-store experience enhancing the attributes of each brand, to drive its sales. Abercrombie’s product portfolio includes knit and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products and accessories.
Moreover, in an attempt to improve cash flow and enhance management’s focus in the direction of 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 toward accelerating presence in the global markets as a means to drive top-line growth. The company expects to incur capital expenditure of $300 million for fiscal 2011. A portion of the cash will most likely fund a slew of new-store openings. During fiscal 2011, the company plans to open stores in Paris, Madrid, Dusseldorf, Brussels, Dublin and Singapore under its Abercrombie & Fitch flagship stores. Apart from this, the company has planned to open 30 to 40 international mall-based Hollister stores. Consequently, this provides a strong upside potential to the company.
Apart from this, Abercrombie has a solid balance sheet with cash and cash equivalents of $826.4 million and long-term debt of only $68.6 million at the end of the fourth quarter of fiscal 2010. This offers Abercrombie a financial flexibility to drive future growth.
However, the company has to depend on independent third party suppliers for all of its merchandise requirements as the company does not own any manufacturing facility. The company’s operations may be adversely affected if these manufacturers are not able to ship orders in a timely manner or meet the company’s quality standards.
Moreover, the company operates in an extremely fragmented market and competes with national as well as regional players. Furthermore, apart from competing with larger retailers such as Gap Inc. (GPS), Abercrombie is facing increased competition from value-priced specialty retailers such as Aeropostale Inc. (ARO) and Buckle Inc. (BKE).
ABERCROMBIE (ANF): Free Stock Analysis Report
AEROPOSTALE INC (ARO): Free Stock Analysis Report
BUCKLE INC (BKE): Free Stock Analysis Report
GAP INC (GPS): Free Stock Analysis Report
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