hedger78's  Instablog

Abercrombie & Fitch Co. is a specialty retailer that operates stores and direct-to-consumer operations. The company sells a broad array of products, including: casual sportswear apparel, graphic t-shirts, fleece, jeans, and shorts. The company has strong brand recognition specially its Hollister brand.

Abercrombie & Fitch Co. currently trades at $31.54. The company's stock has taken a nosedive as shown below because of macro economic uncertainty and weak financial results.

Source: ycharts.com

The EPS dropped from $1.67 in FY 2010 to $1.42 in FY 2011 primarily because of slowdown in European economy. Elevated operating costs also led to a disappointing finish to FY 2011. Charges of $0.88 a share because of special items, including asset impairments also significantly reduced the 2011 EPS. Excluding charges for impairments and write-downs of store-related long-lived assets the company would have reported adjusted, non-GAAP net income per diluted share from continuing operations of $2.30 for the fifty-two weeks ending January 28, 2012.

The company management and wall street are projecting an EPS of $3.25 for FY 2012 (a 229% jump). The company boasts high revenue per share of $4.0 among its peers after Gap Inc. The company had 82 million shares outstanding as of June 1, 2012. The current PE is in line with the peers but the forward PE of 9.70x is at deep discount from its peers as shown below.

The company is planning on widening its footprint outside of United States and closing loss making stores in the United States. ANF closed 27 stores in 2010 and 24 stores in 2011.

The operating margin reduced from 13.3% in 2010 to 12.2% in 2011 because of increased operating costs. Return on equity reduced from 29.4% in 2007 to 7% in 2011. The return on equity and capital should jump back to 15% levels in FY 2012 with improvement in European market and streamlining of overall business. The company has only $57.9 million in long term debt.

I anticipate the company to be trading between 15x to 20x of 2012 EPS by the end of FY 2012. Based on these P/E ratios the stock should be trading between $48.75 to $65, a significant upside to current price.

Disclaimer: I do not own ANF or intend to own the stock in next 72 hours.

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