Abercrombie Soars on BofA Upgrade

NEW YORK ( TheStreet) - Provocative teen retailer Abercrombie & Fitch ( ANF) spiked more than 5% Friday as Bank of America/Merrill Lynch upgraded the shares to 'buy' from 'neutral.'

Shares soared 4.2% to $51.70.

BofA/Merrill analysts Paul Alexander and Lorraine Hutchinson said they changed their rating on the New Albany, Ohio-based retailer after seeing "a number of potential sources for earnings beats and catalysts that could improve sentiment and lead to higher earnings estimates," according to an investor note published today.

The analysts raised their 12-month price target to $60 from $54 to reflect increased earnings estimates and peer average multiple, they said. The analysts also upped their 2013 full year earnings estimate by 8 cents to $3.30 a share "to reflect greater confidence in the company's profit initiatives."

Also see: Abercrombie Plunges Amid Disappointing Earnings, Lowers Guidance

"The stock has taken a step back after a mixed 1Q, but we think the quarter's worst problems were temporary and we now see numerous areas where Abercrombie could beat expectations, particularly next year," the analysts wrote, adding that cost cutting initiatives and strategies "boosting average unit retail (AUR) are not yet fully baked into numbers."

The analysts also expect "acceleration" of comparable store sales.

Year-to date, the stock has underperformed its peers. The S&P 500 Retailing Index is up roughly 21% since Dec. 31 compared to Abercrombie which gained 8% in the same time period.

Also see: Abercrombie Forced to Apologize

According to Bloomberg, roughly half of 30 analysts surveyed rate the company an equivalent of a buy while 40% have a hold rating on the shares. (Bloomberg recommendation data doesn't include BofA/Merrill's.)

While Abercrombie trades a 15.2 times estimated earnings, its highest level in more than a year, according to a data compiled by Bloomberg, the BofA/Merrill analysts say there is still room for upside.

Wall Street "has not yet fully appreciated the potential of Abercrombie's new AUR Initiative," the note said.

"Abercrombie gave initial projections of savings from a new cost-cutting program on the 1Q call, but the company still has given no guidance on its AUR effort. We estimate that a 1% increase in AUR through this initiative would equate to ~$0.40 of EPS in F2014," the analysts said. "Given the AUR decline in recent years and the company's short track record with promotions, we think improvement is likely. We expect more efficient promotions and clearance that capture higher realized selling prices to drive improvement."

Abercrombie's first-quarter earnings, announced two weeks ago, were disappointing. The company said that comparable stores sales sunk 17% compared to the year before as it reported a net loss of $7.2 million, or 9 cents a share.

"Comparable sales trends progressively improved during the quarter and with the inventory headwinds largely behind us, we expect to see continued sequential improvement in the second quarter," Jeffries said in the release. "We are also making good progress on our cross-functional initiatives, which we expect will generate substantial operating margin improvement on a sustainable, long-term basis."

Abercrombie said in the release that it is now "modestly more cautious" with regards to guidance for the rest of the year. The company expects full-year diluted earnings per share in the range of $3.15 to $3.25.

It's also been in the news lately over resurfaced comments CEO Mike Jeffries made in 2006 that detailed why the retailer wanted only the "cool," "good-looking" kids to wear its clothes, which apparently doesn't apply to people who wear larger than a size 10.

Abercrombie was forced to issue an apology after a petition on Change.org garnered roughly 70,000 signatures.

-- Written by Laurie Kulikowski in New York.

To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.

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