Abercrombie Shares Gain on Upgrade

NEW YORK ( TheStreet) -- Shares of Abercrombie & Fitch ( ANF) got a lift on Monday after Brean Murray upgraded the stock to buy and set a $65 price target, declaring it's time to get "more aggressive" on the name.

The firm, which also boosted its earnings views for fiscal 2013 and 2014, said it believes mild weather in February and March was a big help for New Albany, Ohio-based company, allowing it to winnow down what was a significant inventory position headed into 2012, and this should help margins rebound later in 2012.

Brean also thinks the stock is cheap at current levels, noting that its new price target represents a 13X forward price-to-earnings multiple for Abercrombie on a cash-adjusted basis using its higher estimate for a profit of $4.44 a share in fiscal 2014 vs. a prior projection for earnings of $4.31.

The stock gained 4.4% to $51.78 in afternoon action. Based on Friday's close at $49.61, the shares were down more than 16% in the past year; although they've bounced 23% since hitting a 52-week low of $40.25 on Feb. 3.

"One of our major fears was that the company would continue to underperform under the weight of an over 40% increase in inventory per square at the end of 4QFY12," Brean wrote. "With record warm weather in March, we are seeing the return of out of stocks on key seasonal items such as denim, and material progress on clearing out left over winter goods. While there will be an impact on margins (we are modeling a 400 bp decline in gross margins in 1QFY13), we believe the worst is over in terms of inventory weakness, which should allow for a quicker margin recovery going forward."

The firm is expecting discounting to slow down from here on out, especially with the company working to close underperforming U.S. stores. Abercrombie is slated to report its fiscal first-quarter results on May 17. The average estimate of analysts polled by Thomson Reuters is for earnings of a penny per share on revenue of $953.6 million for the three months ending in April.

"While experience has shown us that retailers are almost neurotically optimistic, they generally have a good handle on store openings and closings, inventory orders and material costs (at least for the next six to nine months ahead)," Brean Murray wrote. "Based on what we have heard in 4Q conference calls, we will see progressively less inventory and costing pressures as we move through FY13, which should allow for material margin upside going forward."

Most of the sell side is bearish on Abercrombie. Of the 36 analysts covering the company, 21 are at either hold (19) or underperform (2).

Check out TheStreet's quote page for Abercrombie & Fitch for year-to-date share performance, analyst ratings, earnings estimates and much more.

-- Written by Michael Baron in New York.

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