Earnings Preview: Is Abercrombie Back in Style?

Wall Street will be watching Abercrombie & Fitch's (ANF) upcoming full-year earnings report closely for signs that the teen apparel retailer is picking itself up after a year of body blows and is ready to fight off its more price-conscious rivals.Analysts are expecting the company to announce fourth-quarter earnings of 87 cents per share, according to Thomson Reuters' consensus estimate. That's far below the $1.10 Abercrombie posted for the same quarter in 2008 and just over a third of its $2.40 earnings per share in 2007. But after spending the first half of 2009 in the red and squeezing modest profits from the third quarter's back-to-school sales, investors want to see the company show signs of stability, if not outright growth, when it reports full-year results on Tuesday.

Abercrombie got a boost when sales turned positive in January, thanks to redemptions of gift cards it gave away as part of a holiday promotion, and also due to an easy comparison with January 2009. The company posted an unexpected 8% jump in same-store sales when analysts had expected sales to drop by that much, at least.

Wall Street is hoping January's numbers marked a turning point for the company, after a year of double-digit sales declines. But some observers also warn that the rock 'n' roll retailer looks more like a blues musician: It's been down so long, it's starting to look like it's up. January's sales increase was compared to a 20% drop in same-store sales in January 2009.

Still, the jump in sales led several analysts to re-examine the stock, anticipating a turnaround. Buckingham Research moved it from neutral to buy with a price target of $44 per share, and Oppenheimer moved it up to outperform and a target price of $46. Those are aggressive calls for a stock that posted a 52-week high of $42.31 in November, but has been trading in the mid-to-low $30 range since early December.

Strong and Growing in Europe, Japan

Until recently, analysts had not been particularly kind to Abercrombie's stock; the First Call consensus rated it a hold. After Abercrombie posted weak December sales, Goldman Sachs dropped it from its conviction buy list but kept its buy recommendation.

Investors had worried since the start of the recession that the company's stores were refusing to discount and were losing customers as a result. The analysts had pointed out that while Abercrombie was losing sales, rival Aeropostale (ARO) was aggressively luring away its customers with lower prices.

As recently as the third-quarter conference call, Abercrombie CEO Mike Jeffries told analysts: "Our business model was not built on running a promotional business and never will be." Yet, he said the company recognized shoppers are now more deal-driven and is prepared to offer lower prices on spring merchandise.

The critics were encouraged by the holiday promotions and are pinning some hopes abroad, where Abercrombie's brand is strong and growing. Its stores in Europe are posting growing sales, and it expanded into Asia during the fourth quarter with the opening of a Tokyo flagship in December.

In January, Piper Jaffray analysts restated their outperform rating on Abercrombie's stock and raised the target price from $40 to $44 after visiting the Tokyo store, saying they had underestimated the region's potential. Investors will be expecting an update on sales in Tokyo and any plans to step up the schedule of foreign store openings, which in 2010 include more Japan stores and additional European markets.
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