Abercrombie & Fitch’s (NYSE:ANF) stock gained earlier this week after a report by Barclays that puts it as one of its top seven retail sector picks. While the report suggested that the business should benefit from closing of unprofitable stores, expense leveraging and annualization of new stores opened in 2011 and margin recovery from lower costs, we believe that slow and steady improvement in European economy should also benefit the company going ahead. Abercrombie & Fitch competes with other specialty retailers such as Aeropostale (NYSE:ARO), American Eagle Outfitters (NYSE:ANF) and Gap Inc. (NYSE: GPS) in teen apparel space.
Improvement in European economy should benefit Abercrombie going forward
Declining financial health of Europe has been a major source of concern for Abercrombie since the last quarter as the stock has lost 40% since the beginning of November. While Abercrombie tried to justify that its European operations are still very profiting in its Q3 earnings disclosure, the investor is overtly cautious due to a decline in growth of its European operations.
The stock gained on Tuesday on signs of improved economic prospects in Germany and a better than expected Spanish short-term debt auction.
Germany business contributes a significant chunk to Abercrombie’s European operations as the company operates 1 Abercrombie & Fitch flagships store, 11 Hollister stores and 1 Gilly Hicks store in Germany.
Additionally, Abercrombie is targeting Germany as a high priority market for its European expansion in the near term. We expect the improvement in German macro-economic conditions and German business expansion to be a major driving factor behind Abercrombie’s Q4 European business growth.
Our price estimate for Abercrombie & Fitch stands at $64, which is roughly 30% above the current market price.