Editor's note: This Breakout Stocks Alert was originally sent to subscribers Nov. 15 at 9:36 a.m. EST. It's being republished as a bonus for TheStreet.com and RealMoney.com readers.

Abercrombie & Fitch

(ANF) - Get Report

, recently trading at $74.47, reported third-quarter earnings Tuesday after the close, and we'd like to update readers. We are not taking action in this Alert.

For the quarter, Abercrombie reported earnings of $1.11 a share on sales of $863 million, which was essentially in line with analysts' expectations. Total sales grew 22% year over year, with same-store sales growing 5%, a fairly impressive performance considering the company's tough year-over-year comparisons.

Internet sales rose 21% year over year to $41 million, or about 5% of revenue. Abercrombie also reiterated its full-year earnings guidance of $4.59 to $4.64 a share, which is in line with Wall Street estimates.

Gross margins fell slightly year over year to 65.8%, but operating margins rose to 18.9%, substantially improving both year over year and sequentially. Abercrombie's balance sheet remains in very good shape, with $374 million in cash and no debt. The company also had a nice improvement in its inventories, with days of inventory falling to 133 from 172 last quarter, and from 163 in the year-ago period.

While Abercrombie's quarter was not spectacular, it was impressive in light of the company's stellar third-quarter 2005 performance, when same-store sales grew by 25% and total sales grew by 35% year over year. Abercrombie will continue to face tough comparisons in the next quarter, as fourth-quarter 2005 sales grew by a whopping 40%, driven by a 28% comp.

Analysts have used the difficult comparison as an excuse to remain cautious on the stock, which we view as shortsighted given that Abercrombie is just a few months away from easing comps.

The fact that comps ease in a few months is exactly why the stock is attractive today, and many of these same analysts have been wrong on the stock since it was trading in the $50s during the summer when we initiated this position.

The retailer may indeed post weak comp numbers over the next few months, because 2005 was a booming year with huge sales growth in high-priced denim. But we believe that with easier comps on the way, investors will quickly buy the stock on any dips.

Abercrombie's long-term outlook remains bright. The core brand is no longer delivering huge growth, but its other divisions are firing on all cylinders and becoming a larger portion of revenue. In fact, there are now more Hollister stores than A&F stores, and the fast-growing Hollister could easily become the company's biggest revenue driver in 2007.

In addition, we believe a possible private-equity or LBO takeover of the

Gap

(GPS) - Get Report

, which has been the subject of many rumors this year, could unleash a great deal of investor money into other apparel retailers like

American Eagle Outfitters

( AEOS),

Guess?

(GES) - Get Report

, and of course, Abercrombie.

With a total of four very solid retail brand concepts and a fifth on the way, a very attractive valuation, an extremely healthy balance sheet, and a management team smartly focused on managing the business for the long term, Abercrombie is an excellent growth stock that's on sale, and we remain bullish.

In keeping with TSC's editorial policy, Michael Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Comeau is a research analyst at TheStreet.com. In this role he performs stock analysis for

TheStreet.com Breakout Stocks

, and is also a regular contributor to RealMoney.com. Prior to his arrival at TSC in June 2004, Comeau worked as a Consultant to Toyota Motor North America, performing in-depth research on automotive industry issues, primarily in the areas of alternative engine technologies, competitive analysis and macroeconomics. His primary market interests include consumer technology, specialty retail, and small-caps. Comeau received a bachelor's degree in Finance from Brooklyn College, and has completed Level 1 of the CFA program.. He appreciates your feedback;

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