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Abercrombie & Fitch Stock Weakness Invites Speculation

Analyst runs leveraged buyout numbers of chain and finds that the economics of a deal "can't be denied."

Abercrombie & Fitch Co.’s sagging stock price has Wall Street speculating about a leveraged buyout of the racy teen retailer.

The firm has been through the rumor mill several times now and Cowen and Co. analyst John Kernan ran the numbers for a buyout today and found that the economics of a deal “can’t be denied.”

In part, that’s because the stock is still picking itself back up after the company missed earnings projections in the fall, when chairman and chief executive officer Michael Jeffries declared, “We are not immune to the macroeconomic environment.”

The stock slipped 1.2 percent to $52.87 today, and is down 31.8 percent since its high last fall of $77.49. On Wednesday, Abercrombie saw a late-day gain on rumors that big private equity firms were looking at the company.

As shares of Abercrombie have fought their way back from their slump this year, the broad retail sector has repeatedly charged to new highs. The S&P Retail Index rose 0.5 percent, or 2.83 points, to 606.69 — the index’s best close ever. The Dow Jones Industrial Average perked up 0.4 percent, or 58.66 points, to 13,252.76.

While Cowen’s Kernan said it was doubtful management was looking to sell, “The economics of the transaction seem intriguing given a domestic business ripe for some type of restructuring, and an international business that would probably benefit from less scrutiny of public investors.”

Abercrombie has an enterprise value of $3.92 billion with earnings before interest, taxes, depreciation and amortization for the past four quarters of $461.1 million.

That’s an enterprise value to EBITDA ratio of 8.5 and Kernan said a private equity could pay a ratio of about 11 — a roughly 30 percent premium, or an overall price of about $6.2 billion.

As investors buzzed about Abercrombie, most other retailers and fashion firms logged gains, including Sears Holdings Corp., up 4.3 percent to $83.43; Aéropostale Inc., 4.3 percent to $21.33; The Jones Group Inc., 2.6 percent to $11.20, and Lululemon Athletica Inc., 2.5 percent to $74.24.

In Europe, markets were also up with the exception of the FTSE 100 in London, which slipped 0.1 percent to 5,940.72.

Debt watchdog Fitch Ratings warned the country could lose its “AAA” rating in the next few years if it doesn’t keep public debt under control. George Osborne, Britain’s Chancellor of the Exchequer, will lay out the country’s 2012 budget next week.

The DAX in Frankfurt rose 0.9 percent at 7,144.45, while the FTSE MIB in Milan increased 0.9 percent 16,993.31, and the CAC 40 in Paris advanced 0.4 percent to 3,580.21.

The day’s biggest gainers included Tod’s, which increased 2.7 percent to 84.25 euros; Metro, 2.7 percent to 30.57 euros, and French Connection, 2.5 percent to 0.52 pounds.

The euro traded at $1.31 while the pound traded at $1.57.