CFO Comments Spark Sellers in Abercrombie & Fitch

Abercrombie & Fitch (NYSE:ANF) shares declined by more than nearly 10% last week after the apparel retail major’s Chief Financial Officer shared his views that the second quarter results may not be as good as its first quarter earnings. The company reported robust first quarter numbers earlier this year with a 22% increase in the net sales over the same period last year reaching $837 million. Total comparable store sales grew 10% with comparable store sales increasing 8% while those for Hollister stores grew 11%.

Our price estimate for Abercrombie & Fitch stock is near $64, which is roughly in line with the current market price.

During the Piper Jaffray Consumer Conference in New York, the company’s CFO, Jonathan Ramsden, said that the results of the second quarter will not be as robust. However, he added that the numbers will be consistent with the company’s previous forecast.

Abercombie & Fitch is a premium brand targeted at the teenagers. During the recession, the company had to lower the prices of its products to compete with the other lower-cost brands. Moreover, even as the market for apparel has picked up, companies are facing margin pressure as the international prices of cotton have shot up with the shortage in supply from China – the world’s largest cotton producer. Going forward the cotton prices may decline in 2011 as the companies may still feel the pressure on margins and may look upon closing certain ‘underperforming’ stores.

The high levels of unemployment has led families to reign in spending on premium brands and has made companies offer discounts or promotionals to clear their excess inventory. These could lead to a decline in the revenue per square foot for the company to the $460-$470 levels.

Drag the trend line in the interactive chart above to see how various downside scenarios could affect Abercrombie & Fitch’s stock value.

See the full analysis for Abercrombie & Fitch