Abercrombie Is Seen on the Recovery Road

NEW YORK (TheStreet) -- Wall Street is becoming increasingly optimistic on Abercrombie & Fitch (ANF) as struggling mall retailers like it enter the back-to-school season.

"Teen retailers are fully set for [back-to-school] and are beginning the season with compelling and aggressive promotions, both in-store and online," Janney Capital Markets analyst Adrienne Tennant wrote in a research note on Monday. "In the teen space our top pick remains ANF, as new flows showcase target and trend-right merchandise and inventory levels look very clean." Tennant rates the company a "buy."

Like its teen retail competitors, American Eagle Outfitters (AEO) and Aeropostale (ARO), Abercrombie is faced with a backdrop of easing mall traffic, a shift in teen preference for cheaper fast-fashion, apparel alternatives as well as online shopping, and in Abercrombie's case a controversial leader resistant to changing consumer preferences. The New Albany, Ohio-based company has seen at least nine consecutive quarters of falling same-store sales.

That's expected to continue at least for the next two quarters despite improving somewhat. Abercrombie will report fiscal second-quarter results later this month. Same-store sales are expected to fall 4%, according to consensus estimates tallied by Thomson Reuters, compared to a decline of 10% in the second quarter of last year. For the third quarter, which will include the back-to-school shopping season, same-store sales for Abercrombie are expected to decline 2.3% vs. 14% last year.

The stock is down 26% since it hit a 52-week intraday high of $52.61 one year ago. But Abercrombie shares have recaptured some of that loss. The stock closed up 2.7% to $39.44 on Monday.

Activist investor Engaged Capital got involved in the stock late last year pressuring the retailer to "reverse years of underperformance," starting with replacing Mike Jeffries, then its chairman and CEO.

Earlier this year, the company made a myriad of corporate governance changes under pressure from Engaged Capital. It stripped Jeffries of his chairman title (he's still CEO). Abercrombie also terminated its poison pill and replaced the majority of its 12-member board with independent directors, most of which have direct retail management experience. Abercrombie also created the position of Chief Operating Officer -- filled by Chief Financial Officer Jonathan Ramsden -- to help manage the "overall execution of the company's long-range strategic plan," it said in April.

Abercrombie has roughly 1,000 stores in the U.S. and internationally as part of its Abercrombie and Hollister brands.

"The updated assortments at A&F and Hollister incorporate more new trends than we have seen at the brands in years," wrote Bank of America Merrill Lynch analysts Paul Alexander and Lorraine Hutchinson in a research note upgrading the stock to "neutral" from "underperform," a sell-equivalent rating. "New items include kimonos, printed leggings, floral maxi dresses and rompers, and the new fall color palette includes the color black. These new bohemian styles and the color black underscore cultural change at Abercrombie, as management has previously said it would never carry either. We think this kind of evolution to new fashion trends is necessary for A&F to remain relevant with teens."

"We now think sentiment will stabilize as excitement around better fall product offsets long-term structural headwinds," the analysts' wrote on Thursday. "The company's new fall assortment, which arrived in stores over the last two weeks, looks markedly improved over past seasons and should be a positive for traffic and conversion."

That said, Abercrombie still has risks. Besides the sector challenges, Abercrombie specifically may have trouble fully executing a turnaround "since the brands' popularity and traffic have dwindled so much in recent years," the BofA analysts wrote. "The new fashion could also be less appealing to A&F's international customer, who is more drawn to the A&F logo and heritage product."

Most recently, Abercrombie hired Christos Angelides to become president of its flagship brand as well as Abercrombie kids. Angelides, 51, comes from U.K.-fashion retail and online chain Next, where he has spent the past 14 years. Next operates nearly 700 stores in more than 40 countries as well as a direct-to-consumer business that consists of both a catalog and online division, according to the June 10 press release.

He will be responsible for "all product and customer-facing activities for the Abercrombie & Fitch and abercrombie kids brands," and "be accountable for the financial performance of the brands," the release said. Angelides is expected to begin his new role at Abercrombie in October.

Nomura Securities analyst Simeon Siegel also reiterated his "buy" rating on in a note to clients on Monday, saying recent the selloff in the shares represents a buying opportunity.

"We believe the drop-off represents a more compelling opportunity," given Abercrombie's "ongoing operational savings," returning cash, "troughing" comps and "as we head into 2H we will start to benefit from lower AUC [average unit cost] as management begins to capitalize on the fact that Hollister represents a majority of sales, but a minority of profits," Siegel wrote.

-- Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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