ANF: Sell Off Could Be Getting A Bit Overdone, Playing for A New Year’s Bounce

by Dan November 16, 2011 2:33 pm • Commentary

Listen, I won’t let me young daughters get near an Abercrombie & Fitch shop, not cause I don’t dig cargo pants and hoodies but because their advertisements are likely to open a whole can of worms that I am not ready for with my 8 and 6 yr olds.

The stock has gotten absolutely annihilated this month down almost 38% on a series of miscues starting about 2 weeks ago when the company disappointed on same store sales as a result of weakness in Europe, Japan and Canada.

Today the stock is down 14% today as the company reported Q3 earnings that missed the consensus estimate of .71 by .14 on worse than expected gross margins as the company struggles to manage higher input costs.   I want to take advantage of that with the following trade:

Technically the stock is within a few % of the 52 week lows from last fall and if there was ever to take a shot on the long side it could be now after a 40% decline in 2 weeks on massive volume.

[caption id="attachment_6250" align="aligncenter" width="300" caption="1 YR ANF chart From Bloomberg"][/caption]


IN  a note to clients this morning BMO Capital downgraded the stock and had the following to say about the miss:

We are downgrading our rating on ANF shares to MARKET PERFORM from
OUTPERFORM. We now see greater gross margin deterioration than we
previously anticipated and believe the pace of margin recovery will take
longer than expected, particularly given management’s aggressive
promotional stance in the domestic channel. Additionally, a weakening
macro picture in Europe casts a cloud of uncertainty on the earnings power
of ANF’s international business in the near term, especially as the company
is still finding its footing there with respect to pricing. While we are
disappointed with the recent spate of bad news around the stock following
the 3Q sales release, with the stock up ~60% since September 2010 (vs.
~20% for the S&P 500), we feel that now is a good time to step to the
sidelines given the risks and low visibility ahead.


On the conf call this morning the company reiterated their outlook for $4.75 in earnings which implies about 50% eps growth, with the stock at about 47.50 that leaves them trading at about 10x next years estimates.  The company is also expected to grow sales 20%……

MY TAKE:  this could be a cheap stock going through a transition from international expansion to a more domestic centric restructuring.  The extreme selling that we are seeing this month is coming from momentum players that had, until 3 weeks ago, experienced fabulous gains and now are hate-selling the stock.  I wouldn’t expect this to abate for some time.   But the New Year could see some value buyers.   The company does not report monthly comps so the next catalyst will be the company’s earnings call in mid Feb.

I want to play for a bounce in the new year.

TRADE: ANF (48.75) Bought the Jan 55/60 Call Spread for 1.00

-Bought 1 Jan 55 call for 1.80

-Sold 1 Jan 60 call at .80

Break-Even on Jan Expiration:

profits bwtn 56 and 60 make up to 4.00, max gain 60 or above make full 4.00

losses btwn 56 and 55 lose up to 1.00 in premium paid, and below 55 lose full 1.00.

TRADE RATIONALE:  The stock is severely oversold on a near term basis and rightfully so.  But with a new year could come a new appetite for risk and any hint of better than expected sales over the holiday season and this stock should fill in a bit of this latest gap.  Risking 1 to make 4 if the stock retraces 30% of this month’s sell off.  I like the risk reward, but given the volatility in the stock of late I think it makes sense to define your risk.