Abercrombie & Fitch Company ANF

Abercrombie & Fitch operates in a profitable niche in the teen retailing space, and like other retailers catering to more-affluent consumers, we expect domestic results will outstrip international results as the U.S. consumer continues to stabilize. The company's portfolio of brands, which includes abercrombie kids, Hollister, and Gilly Hicks, reaches a broad spectrum of consumers across demographic bases. While the teen audience remains easily persuaded to shop where the best fashion exists, being trend- and price-right is likely to be as important as brand loyalty with A&F consumers, but we note a certain allure remains around the company's namesake brand, which will likely make it more resilient through fashion cycles as long as strict inventory management prevails. The teen retailing space is fragmented, with few barriers to entry, which prevents A&F from building an economic moat. Going forward, the company will suffer from slower productivity improvement as management pares back the growth of its international flagship locations, which we deem appropriate in light of to the current the European economic climate. We note that the high unemployment rates for 16- to 19-year-olds (in the mid-20% range) domestically remains a headwind that may also weigh on near-term demand. Given a weak economic outlook, we think management's near-term goals for earnings per share of $3.35 to $3.45 in 2013 could be slightly aggressive.