Abercrombie & Fitch Shares Cheering Stifel Upgrade

• Abercrombie & Fitch Co (NYSE: ANF) shares are down 34 percent year-to-date.
• Stifel analyst Richard E. Jaffe upgraded the rating on the company from Hold to Buy, while maintaining a price target of $24.
• An improved merchandise assortment and a greatly reduced cost structure improve the risk/reward, Jaffe said.

Analyst Richard Jaffe mentioned that Abercrombie & Fitch’s sales trends have accelerated despite reduced promotions. “We believe ANF’s momentum is sustainable driven by: an improved merchandise assortment (fueled by improved talent and inventory management), expense reductions and easy comparisons,” the analyst wrote.

Abercrombie & Fitch reported its Q2 adjusted EPS ahead of expectations, largely due to expense reductions, and guided to sequential comp improvements for 2H, skewed toward Q4.

Although currency movements are expected to have an adverse impact on Abercrombie & Fitch’s future earnings, the same is expected to plateau in 2016 or possibly begin to reverse, Jaffe commented.

Stifel noted that the company is unlikely to return to peak levels of profitability, but a double-digit operating margin is achievable, driven by “improved full price sales driving sales, gross margin and expense leverage.”

“As visibility for significant OM improvement becomes more evident we believe the stock will trade up to our new target price of $24,” Jaffe added.

The EPS estimates for 2015 and 2016 have been raised from $0.24 to $0.80 and from $0.60 to $1.30, respectively.