As Abercrombie & Fitch's Sales Process Progresses, Is It Time To Step To The Sidelines?

Wunderlich analyst Eric Beder sees Abercrombie & Fitch Co. (NYSE: ANF) as a potential acquisition target, pushing him to raise his rating from Sell to Hold.

“Although we believe the company's business model remains broken and the potential for a turn remains limited, in our view, the company's net cash of over $2 per share, dividend yield of almost 7 percent and reports that management has received takeover offers for the business tilts the risk/reward to move us once again to the sidelines,” said Beder.

American Eagle Outfitters (NYSE: AEO), Express, Inc. (NYSE: EXPR) and Sycamore Partners are all expected to make offers for Abercrombie. However, Morgan Stanley analyst Kimberly Greenberger noted back in May, “While we see the strategic rationale in a merger of equals (reducing promotional impressions in the market, corporate headquarter savings, etc.), a takeout of the company at a premium would be highly risky, in our view.”

Will Abercrombie Start To Show Signs of Life?

While the stock has dropped nearly 16 percent since Beder’s downgrade on May 11, the American retailer has a couple of valuable pieces that could give share prices a bump.

A couple of the highlights include an improved sales process, and “Abercrombie’s ability to maintain a net cash balance sheet and to continue to register a dividend yield of almost 7 percent could attract value driven investors.” Beder noted.

It's Not All Good

Beder still does not believe in Abercrombie’s current business model and does not see the shift to target an older customer base is going to pay off in the near future.

Overall, there is not a clear picture ahead for Abercrombie, pushing Beder to step to the sidelines.

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