Wait and See on Abercrombie

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I've never been a huge fan of Abercrombie & Fitch (NYSE: ANF), but I must admit the stock has performed very well in recent years. However, its latest performance might now tag Abercrombie with a "Buyer, beware" disclaimer.

Abercrombie's fourth-quarter net income increased 9% to $216.8 million, or $2.40 per share. Revenue rose 8% to $1.23 billion, although same-store sales fizzled by 1%. Although net sales grew in all of its concepts, comps decreased across the board, with Ruehl No. 925 showing the biggest decline at 19%. That said, Abercrombie was able to boost gross profit for the quarter and the year, when many retailers have had to mark down merchandise like mad.

Abercrombie launched its newest concept, Gilly Hicks, in January; you may be aware of the "naked ambition" this new lingerie retailer seems to, er, embody. Gilly should be an interesting gal to watch, businesswise; intimate apparel can be a tough, low-margin business. Women don't buy undergarments that often, and Limited's (NYSE: LTD) Victoria's Secret is a formidable rival for young customers.  

Abercrombie's guiding for a 5% to 8% increase in earnings for the first half of 2008, to between $1.61 and $1.65 per share, with the low end of the guidance reflecting the potential for a 1% decrease in comps during that time frame. This lags analysts' expectations, and a little free publicity from additional naughtiness isn't helping.

Abercrombie's just not one of my retail dream stocks. I never saw much differentiation between its offerings and those of retailers like American Eagle Outfitters (NYSE: AEO), Zumiez (Nasdaq: ZUMZ), and J. Crew (NYSE: JCG), which all compete with at least one of its retail concepts. I also can't say I was impressed last summer to discover CEO Mike Jeffries bowing out of the company's earnings conference calls. (He's recently been selling shares at an extremely rapid clip.)

There are lots of retail stock bargains out there, and with its PEG ratio of 0.95, Abercrombie could look like one. Still, given the tough consumer climate and the difficult comparisons Abercrombie faces, I can't help wondering whether the short-term challenges it faces might get the best of the company. History tells us that Abercrombie's not bulletproof, so I suspect that this retailer warrants a wait-and-see approach for now.