Deutsche Bank Cautiously Optimistic On Abercrombie, Even As It Makes New 52-Week Lows

Deutsche Bank is cautiously optimistic on Abercrombie & Fitch Co. (NYSE: ANF) ahead of its third-quarter results estimated in mid-November amid the stock touching a new 52-week low of $15.14.

Analyst Tiffany Kanaga cut third-quarter EPS estimate to $0.24 (from $0.34 vs. Street $0.22). The analyst expects same store sales of -3 percent above the Street’s -4.0 percent, reflecting better quarter-to-date trends.

“Despite the warm weather, we are cautiously optimistic as we inch toward 3Q results, with encouraging industry and online data points driving our above consensus comp forecast,” Kanaga wrote in a note.

The analyst projects A&F comp at -5 percent, but above the Street’s -6.0 percent, and Hollister at -2 percent (unchanged vs. Street -2.6 percent).

Related Link: Abercrombie & Fitch Reveals New Branding, Says Will Do Largest Advertising Campaign To Date

Meanwhile, Kanaga reaffirmed a Hold rating on the stock, as the analyst looks for evidence of the brand repositioning, translating into SSS and margin improvement.

Rating Justification

“Our Hold rating reflects balanced risk/reward at current levels, with tourism headwinds and a challenging mall-based apparel backdrop in the U.S. weighed vs. upside potential from company initiatives,” Kanaga continued.

In addition, the analyst said the company is likely tripping its debt covenant at year-end and the prepayments may hit buybacks. Kanaga expects Abercrombie to face about $9 million prepayment in FY17, followed by about $18 million in FY18 and about $13 million in FY19.

The analyst noted that the company’s dividend yield of 5.1 percent is among the highest across DB coverage, and doesn’t consider the dividend at risk at this time.

Kanaga also cut the price target by $3 to $18, citing stiff competition from American Eagle Outfitters (NYSE: AEO), which is benefiting from strong sales of on-trend products and Aeropostale’s store closures.

At time of writing, shares of Abercrombie were down 1.54 percent at $15.36.

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