CSFB Likes Abercrombie

Shares of the teen retailer bounce on a raised earnings estimate.
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Last-minute investors stuffed their Christmas stockings with shares of

Abercrombie & Fitch

(ANF) - Get Report

.

A Wall Street upgrade out Thursday said the high-end teen fashion seller looked poised to outperform its downtrodden peers in apparel retailing, sending its shares up $1.59, or 3.5%, to $46.47.

Credit Suisse First Boston analyst Paul Lejuez raised fourth-quarter earnings estimates for the company to $1.10 to $1.20 a share, citing strong near-term results and healthy cash flows. Consensus estimates call for earnings of $1.11 a share, according to Thomson First Call.

"The retail environment has been flooded with intensifying promotions over the last few weeks, likely pressuring gross margins at many specialty retailers," wrote Lejuez. "Based on our mall/channel checks, we believe Abercrombie & Fitch and Hollister

an Abercrombie subsidiary stand out as two of the busiest yet least-promotional retailers in the mall, boding well for

fourth-quarter earnings."

Abercrombie disappointed Wall Street with its November sales, posting a same-store sales gain of 2%, and the stock has traded roughly flat in December. Now, the company is forecasting flat comps and gross margins for the fourth quarter, but Lejuez said the company has good momentum from three straight months of positive comps. He predicts a 3% to 5% gain in December will boost comps for the quarter to a 1% to 2% gain, allowing for upside in the stock price.

He also said the company's gross margins should be helped by continued improvements in sourcing, higher priced cashmere sweaters and men's woven shirts, and strong sales of pricier handbags.

High-end items have been widely cited as seeing stronger sales this holiday vs. lower-end products. Middle- to low-income consumers are said to be squeezed this season by high gas and home heating costs, sluggish job growth and increased debt-loads.

Abercrombie has responded with attempts to elevate its brand to "casual luxury," a move that leaves it well-positioned for the current economic environment, and the trend could continue into 2005. Also, it boasts strong cash flows and an attractive share repurchase program. In the third quarter, it repurchased 5.4 million shares for $180 million and unveiled a plan to keep $300 million to $500 million in cash on its balance sheet.

Lejuez increased his fiscal 2004 earnings estimate for Abercrombie to $2.47 to $2.55 a share, up from the $2.06 logged in 2003. That allows for some decent upside to Wall Street's consensus estimate of $2.47. For 2005, he forecasts earnings of $2.80 to $3.05 a share, compared to the consensus estimate of $2.82.

Lejuez said upside in Abercrombie's 2005 earnings will be "driven by a continuation of strong business trends and continuation of its aggressive share repurchase program."

He does not disclose any position in the stock, but CSFB expects to have an investment banking relationship with the company.