Chad Brand's thoughts on Abercrombie & Fitch

Abercrombie & Fitch Co. (NYSE:ANF) shares hit $13 last month and since then have recovered to the low $20 range, Chad Brand believes the 'risk-reward scenario that looks very favorable'.

Chad has some valid points and by a look at ANF shares recent performance, it would appear the Street agrees with Mr. Brand.

Given the amount of bad news already priced into ANF shares, they look very cheap even if sales continue to drop throughout 2009. Even if you assume earnings fall 50% from their 2007 peak level, never recover at all, and the stock only fetches a 10 P/E, investors buying today will make a 30% return from current levels. That is a risk-reward scenario that looks very favorable.

The WSJ cites November same store sales drops of 28% for Abercrombie versus only 10% for Pacific Sunwear (PSUN) and 11% for American Eagle Outfitters (AEO) as evidence that markdowns boost sales in the short term, which is certainly true. But the key here is margins. While gross margin collapsed for the latter two retailers (Pac Sun from 34% to 29%, American Eagle from 47% to 41%), Abercrombie’s held steady at a stunning 66%.

SOURCE: http://www.peridotcapitalist.com/2008/12/abercrombie-chooses-fewer-more-profitable-sales-over-lower-margin-bargain-bins.html