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Tickers in this Article: ANF, AEO, JCP, M, GPS
When the economy nosedived, Abercrombie & Fitch's (NYSE:ANF) stock cratered, like those of many other retailers. But it's well off its lows now, and some think that trendy retailers could be the place to invest given the economic rebound. Even if that's true, I'm not so certain that Abercrombie is the best company for this type of play.

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The Cons
In a sense, I really like Abercrombie because it offers nice clothes, what is arguably some of the most head-turning advertising I've ever seen, and because it has a nice store layout. However, from an investment standpoint I'm not as impressed.

One reason is that the stock has had a pretty sizable run since June and I think we could see some profit taking soon. Of course, Abercrombie isn't in this boat by itself, as many other retailers have had a nice run over the last couple of months, including popular department stores JC Penney (NYSE:JCP) and Macy's (NYSE:M). I actually think that those two stocks are susceptible now, too.

Beyond the recent run up, I'm also concerned with the big multiple of expected earnings it trades at. The company is expected to earn 87 cents a share this year and $1.52 next. In other words, it trades at 37 times this year's estimate and right around 21 times next year's estimate, which I think seems way too expensive. Frankly, I'd like to have a little more in the way of evidence that next year's estimate is actually feasible before pulling the trigger. If the stock were to drop back to the low to mid $20s I might change my mind too.

It's important to note that Abercrombie is expected to release its second-quarter results later in the week. The consensus estimate is for the company to lose 6 cents per share. To be crystal clear, I don't have a feel as to whether the company will meet that expectation, but I'm pretty sure I won't be too excited if it generates an EPS loss. That said, I am turned off because it appears as though the estimate for the quarter has been ratcheted lower over the last month. The estimate was for a loss of 3 cents a share 30 days ago; it's now a 6-cent loss. That is obviously not the direction investors want to see estimates heading.

The Flip Side?
For what it's worth, earlier in the month retailer American Eagle (NYSE:AEO) upped its outlook for the second quarter. Gap (NYSE:GPS) also said it now expects second-quarter earnings to range from 30 cents to 32 cents, above the 28-cents-per-share consensus view. Might this be a harbinger of things to come for Abercrombie? Maybe, but even if Abercrombie were to beat estimates, it's tough to get tremendously excited. After all, its comps sales in July were off a pretty steep 28%, which suggests there's lots of room for improvement.

Bottom Line
Abercrombie's advertising may be a huge head turner, but its stock is not. Given that the stock is trading at a high multiple of expected earnings, and given the recent run up in the share price, I plan on steering clear of the shares heading into the earnings announcement. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

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