Stifel Raises Abercrombie & Fitch (ANF) to Buy; Product, Cost Reductions Will Drive Gains

Stifel Nicolaus upgraded Abercrombie & Fitch (NYSE: ANF) from Hold to Buy and establishes a $50 price target.

Analyst Richard Jaffe noted the following two points on the upgrade:

1. Product: It appears the company’s merchandise turnaround (aided by testing close to 100% of the assortment, shortening lead times, and increasing style differentiation) is gaining traction. We believe the recent floorsets at Abercrombie, Hollister and abercrombie kids have improved versus previous floorsets with the brands hitting on most of the season’s key junior trends. This is evidence to us that management has finally embraced change and is willing to update the brand aesthetic and move away from the classic New England preppy look.

2. Cost Reductions: The company has almost completed the restructuring of its bloated cost structure. In our opinion, ANF had been operating with an inflated expense structure. By the end of 2014 the company will have cut a significant amount of expenses from its cost structure, $175 million annually. A leaner cost structure enables the company to better leverage sales and drive EPS.

Given our more favorable outlook for the company, we are raising our 4Q, 2014 and 2015 EPS estimates to $1.94 (from $1.87), to $2.50 (from $2.43) and to $3.40 (from $3.14), Jaffe commented.

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