S&P Affirms Ratings on Abercrombie & Fitch (ANF); Removes from CreditWatch Negative

Standard & Poor's Ratings Services today affirmed all of its ratings, including its 'BB-' corporate credit rating, to New Albany, Ohio-based Abercrombie & Fitch Co.(NYSE: ANF). We removed all the ratings from CreditWatch with negative implications, where we placed them on Nov. 7, 2014. The outlook is negative.

"The affirmation reflects our expectation that the company can conserve profits with expense and inventory management, despite the recent sales declines and our expectation for that to continue in 2015. The negative outlook signifies our expectation that the issues surrounding the company’s longer term strategic initiatives leave the company vulnerable to heightened levels of instability given the recent negative top line trends experienced," said credit analyst Kristina Koltunicki. "We now believe signs of a turnaroundfor comparable-store sales and operating performance will be deferred until later in 2015. The company continues to experience ongoing sales weakness bothdomestically and in Europe."

The negative outlook reflects our expectation that revenues and gross margin to remain pressured for the remainder of 2014 and into 2015 given our view that the retail environment will continue to be competitive and highly promotional. We believe Abercrombie continues to make headway with its transition into more fashion-forward merchandise but are skeptical that it will be successful in the near term with consumers and in turning around negative trends.

Downside scenario

We could lower our ratings on Abercrombie if operating performance does not show signs of rebounding during 2015 possibly as a result of merchandise missteps related to its fashion-conscience teen consumer and a persistent slowdown in U.S. mall traffic. At that point, EBITDA would erode by about 15% from forecasted levels, which would result in leverage approaching the mid-5.0x area. We could also lower the ratings if Abercrombie becomes more aggressive with shareholder friendly activities, including debt-financed sharerepurchases, resulting in the deterioration of leverage to similar levels.

Upside scenario

An upgrade is not under consideration over the next year, given our tempered performance expectations. We could consider revising our outlook to stable or, longer term, raising ratings, if operating performance becomes less volatile, demonstrated through more consistent EBITDA generation. An alternative scenario for an upgrade would include an improvement to credit metrics, such that debt leverage would improve to under 4.0x and FFO to debt would increase more than 20%, on a sustained basis. EBITDA would need to increase by approximately 20% from forecasted levels for this to occur.

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