Why Abercrombie & Fitch’s Turnaround May Have a Lot More Room to Run

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Some ailing companies never manage to turn around for shareholders. Others manage to stage miraculous turnarounds. Abercrombie & Fitch Co. (NYSE: ANF) falls somewhere in the middle, but after it hit 52-week highs, one analyst believes that this turnaround has a lot of room to run.

Abercrombie was among the top analyst upgrades and downgrades on Friday, January 19, 2018, with the independent research firm Argus raising its Hold rating to Buy. What stood out here was that Argus matched the existing street-high price target of $25 in this call. While Argus is not part of the sell-side research tracked by Thomson Reuters, this price target is more than $10 higher than the consensus analyst target price of $14.62.

Note that Abercrombie shares were already much higher than most analyst targets. This implies, as we have seen with so many other companies, that analysts may have to handily raise their expectations and targets for Abercrombie.

Before focusing on just the bullish sides of the call, it is important to understand that Abercrombie has not released any guidance on December sales after the holiday season. That means that the earnings report still being six weeks or so out may help or hurt the thesis behind the Argus bullish call. When the company posted earnings last November, its guidance for the quarter was for comparable sales to be up in the low single digits and net sales to be up in the mid-to-high single digits.

According to the Argus report, Abercrombie shares had been on a five-year slide, and the company had fallen out of favor with its former core market. A driving force for the turnaround is that a new CEO is implementing a turnaround plan and beginning to see positive results. This was highlighted as being after two positive earnings surprises in a row, and also that Abercrombie is becoming more transparent with investors.

Another driver here is that Argus sees Abercrombie’s valuations as attractive compared to its peer group. Also mentioned as a support tool was the 4.2% dividend yield.

A new chief marketing officer and the company launching a new marketing campaign were also touted as being around the company’s historic association with outdoor adventure and exploration. The Argus report said:

We note that young consumers’ perceptions of the Abercrombie & Fitch brand have also improved significantly, according to a YouGov BrandIndex survey, which should help to boost sales and market share over time.

And Abercrombie shares were even seen as positive from its stock chart perspective. Its shares were represented as having been in a long-term bearish trend of lower highs and lower lows that dated all the way back to May of 2013. That has now changed, after a double-bottom in the $8 to $9 range has acted as a floor and as the recent stock price trends have been bullish.