Potential 50% Upside For Abercrombie & Fitch

| About: Abercrombie & (ANF)

Abercrombie & Fitch (NYSE:ANF) is an American clothing retailer listed on the US stock exchange. Founded in 1892, it produces clothes specifically designed to appeal to young adults. As of May 2012, it had 1,049 different stores, with operations in 16 countries. Its main competitors include The Buckle (NYSE:BKE), Urban Outfitters (NASDAQ:URBN), and American Eagle Outfitters (NYSE:AEO).

Last year, Abercrombie & Fitch recorded revenue of $4.258 billion, up $689 million from the previous year, and net income of $128 million, down $22 million from the previous year. As of the end of the last financial year, its total assets were $3.048 billion, and its total equity was $1.862 billion. Since the end of October, the company's share price has dropped from a high of $78.25 to its current price of just $32.16.

Investment Thesis

Abercrombie & Fitch has undergone somewhat of a reinvention in the last few months, as it seeks to increase its market share. It has overhauled its denim line in attempt to make its portfolio more attractive to shoppers. It has also started to expand its sporting line in an effort to reach out to the younger generation who are more fitness focused.

Its brand image is incredibly strong. Abercrombie & Fitch have been consistently able to predict fashion trends and in some cases set the trend. This has created a strong consumer following, which it will be able to rely even though the competition is intense. The brand is particularly strong among teens who want to gain status. This particular niche will always exist and the company seems to excel at exploiting it. This will help its long-term growth and its bottom line as it seeks to grow.

Abercrombie & Fitch's brand Hollister is also very important for the company. Hollister is expected to be the main source of growth for the company. Abercrombie has estimated that Hollister will open 40 stores in 2012; in contrast, the main brand is estimated to open just 6 stores in the same time period. This will help it to establish its position as one of the leaders in US retailing and will fuel domestic growth.

Furthermore, the international marketplace presents an exciting opportunity for the company. Abercrombie & Fitch already has a presence in Europe, however, there is a lot of room for the company to expand both in Europe and Asia, as well as potentially in Latin America. Increasing stores internationally will help fuel online sales as the brand will become more recognizable worldwide. Abercrombie also tends to do better internationally than domestically. It has just 100 stores located outside of the US, this is less than 10% of its total stores; however, its international sales represent more than 20% of total sales. This clearly illustrates how important international focus will be for the company.

Risks

Unfortunately for the company, there are very low barriers to entry, so new players can enter the market easily and challenge the company for market position. Also, Abercrombie is already forced to price lower due to fierce competition in the marketplace. Furthermore, the company has to continue to predict trends in the future, as without this the company brand will become less effective. However, Abercrombie & Fitch has positioned itself well in the past to stave off any potential competition and operates in a very exclusive niche. It has also proven effective at producing new product lines time that are popular with consumers, so there is no reason to suspect it cannot continue to do this.

Also, on a macro scale, like every other company in the retail business, Abercrombie has been plagued by high costs of production as the dollar has appreciated, and a gloomy economic outlook. There is nothing Abercrombie cad do about either of these factors; however, the economy is showing promising signs of recovery which will benefit Abercrombie immeasurably in the near future.

Conclusion

Morningstar rates the company's fair value at $58.00 per share; it also recommends buying at any price below $34.80, while giving it a five-star rating. The Motley Fool is less convinced and given Abercrombie & Fitch just two stars. However, the great majority of the company's users believe it will outperform the marketplace. Overall, at this price, I believe Abercrombie & Fitch has significant upside, and possibly more than 50%. However, I encourage you to draw your own conclusions.

My data is from morningstar.com, unless otherwise stated.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.