Abercrombie & Fitch Shares Have More Room To Run, Despite 30% Rally

| About: Abercrombie & (ANF)

Shares of teen retailer Abercrombie & Fitch (NYSE:ANF) soared over 30% after releasing third quarter earnings. The company beat revenue and earnings per share targets, while also raising full year guidance. Was Wednesday's move the sign of a positive trend in teen retail, or were shares just undervalued?

Abercrombie reported third quarter net income of $71.5 million. Earnings per share were $0.87 for the third quarter. Both of these numbers were large increases from the previous year ($50.9 million, $0.57 respectively). Total United States sales were flat at $818.6 million. International sales increased 37% to $351.1 million. Direct to consumer sales, which are included in the geographic numbers, were up 20% to $158.3 million.

Overall, comparable same store sales dropped 3%, broken down as follows:

· Abercrombie & Fitch: -4%

· Hollister: -1%

· Abercrombie kids: -3%

Total sales broken down by operating company:

· Abercrombie & Fitch: $440.0 million

· Abercrombie Kids: $99.8 million

· Hollister: $602.5 million

Abercrombie ended the quarter with a cash position of $349.7 million. The company is using its cash position to aggressively buy back shares. The company bought 3 million shares, at a total price of $104.3 million, during the third quarter. Abercrombie has almost $20 million remaining on its share repurchase program.

In the third quarter, Abercrombie opened a flagship store in Hong Kong, a combined Abercrombie & Fitch/Abercrombie kids in Munich, and 9 Hollisters in the international market. At the end of the third quarter, Abercrombie had 1,067 stores broken down as:

· Abercrombie & Fitch: 278 United States, 17 international

· Abercrombie kids: 154 United States, 6 international

· Hollister: 486 United States, 101 international

· Gilly Hicks: 18 United States, 7 international

Abercrombie has been aggressive in international store openings as it enters new territories and shies away from European weakness. The company will open stores in Seoul, South Korea, and Shanghai, China in 2013. Plans for the fourth quarter of this year also include new stores in Dublin, and Amsterdam.

The key to Wednesday's rally was raised guidance by the company. Analysts on Yahoo Finance currently see the company posting full year earnings per share of $2.48. The company posted revised targets of $2.85 to $3.00 on Wednesday, setting up for a huge earnings beat. With shares trading at $42, the current price to earnings ratio is 14. The new guidance does not factor in any share buybacks in the fourth quarter, which is a huge thing to think about. If the company buys back 3 to 5 million shares during the fourth quarter, earnings could hit over $3 a share in the year.

Abercrombie has beat earnings estimates each of the last three quarters, and there is no reason a strong holiday season couldn't lead to all four fiscal year quarters beating estimates. Analysts expect $1.70 in earnings per share in the fourth quarter. The longer than normal holiday season and stronger direct to consumer shares set the company up for one of the best Christmases ever.

Back in May, I recommended picking up shares of Abercrombie, when they traded at $39. My price target was set at $55 by the end of 2012. The reasons behind the buy recommendation were new international growth, and strong direct to consumer sales. Both of those numbers were positive Wednesday, and I am back to re-recommend buying shares. I think shares will dip Thursday, as some investors sell into the rally. Look for shares around $40 and buy before the holiday season.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.