6/8/2011
By Brian Sozzi, Research Analyst

Abercrombie & Fitch (ANF) management played the role of grim reaper at today's Piper Jaffray conference, sounding a tad more cautious on 2Q financial prospects.  Considering Abercrombie's shares have outperformed on a relative basis since retail stocks began to nosedive on May 12, and over a year of solid financials in the books, any inkling of a deceleration from the fruitful times was to be met with selling pressure.  I think the move in the stock today errs on being overdone; gross margin comments mirrored those made throughout 1Q and while lighter than planned inventory in 2Q may constrain comparable store sales upside, it should aid gross margin which is important as inflation is now front and center (note that product scarcity has a been a theme during my Abercrombie store walks).  Furthermore, I think the Street has properly adjusted for 2Q gross margin pressure, lowering EPS estimates nicely post the 1Q earnings call; what we have seen since is a re-pricing of the stock.  If the stock closes the gap created in response to a bullish analyst day in April, it may represent a place to consider position building.  For now, there is no rush.

Notes

* I am starting to question if we have another Martin & OSA situation in Gilly Hicks (a brand management stays committed to for too long).
* Reiteration of international profit margin flow through comments.
* FY12 pre-opening costs for international stores may be on the high side of some analyst models.
* Path to FY13 call out of $4.75 p/s will not be smooth sailing.

Brian Sozzi
Wall Street Strategies

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