Taipan Online: Hotline

Now try to figure out exactly why the trendy clothes retailer sold off so
badly yesterday (shares down US$2.32, 3.6%, to US$61.23) and is
getting hammered this morning (down US$3.90, 6.4%, to US$57.34 as I
write). Pretty tough to come up with an answer, eh?

Surely, it's not because the company missed second quarter earnings by
six cents? At Taipan, we ignore that kind of stuff because analysts'
forecasts are often a big waste of time. Instead, we prefer to focus on the
bottom line – the ACTUAL results, not just what a bunch of hyped-up
analysts want to see.

Abercrombie is yet another example of Wall Street's wacky logic at work.

You've probably seen it many times yourself. When a company reports
bad news, its stock moves higher. When a company reports great news,
the stock sells off. Investor psychology is so difficult (if not impossible) to
predict that it's an exercise in futility – and it's enough to drive you crazy!

Abercrombie & Fitch got hammered yesterday after reporting this set of
outstanding second quarter earnings, compared with Q2 2004:

Net sales soared 42% to US$571.6 million.

Of that, Abercrombie & Fitch net sales rose 22% to US$305.6 million
(same store increase of 26%); abercrombie net sales jumped 52% to
US$63.3 million (same store sales up 57%); Hollister net sales rocketed
up 82% to US$199.8 million (same store sales up 29%).

All that produced a gross profit margin of 68.2% for the quarter and a
net income rise of 34% to US$57.4 million.

Net income per share swelled 43% to US$0.63.

Those results let the company to bump up its full-year earnings guidance
from a range between US$2.80 to US$3.00 to between US$3.10 and
US$3.30 on sales of US$2.7 billion.

And as if that weren't enough, the executives decided to reward their
shareholders by raising the quarterly dividend payment by 40% to 17
cents per share, payable on September 20 to shareholders on record as
of August 30.

So why on earth are folks bailing on the stock like it's the Titanic?
Because it missed its oh-so sacred earnings estimate by six cents (63
cents versus 69 cents), despite beating forecasts for the previous four
quarters? Who knows? And who really cares? This is still an excellent
profit for the company – and investor foolishness gives you a very good
chance to turn a handsome profit yourself by scooping up some
September 60 Calls.

As recently as July 7, ANF hit a 52-week high of US$74.10. Just
yesterday, its intraday high was US$63.40. And now this selloff.

It's clear to me that ANF is going to refill the big gap created and scoot
back to US$60 and above very soon. So buy the ANF September 60 Calls

(ANFIL.X) under US$1.40 per contract as soon as you can. These options are dirt-cheap at the moment, currently down US$2.15 today and trading at around US$1.30 per contract because of the massive selloff.

Best regards,

Martin Denholm
Executive Editor, Taipan

P.S. Abercrombie is a company and stock I know very well. I originally
recommended it in the December 2003 Taipan issue (with an official
entry price of US$28.83 on November 24, 2003). After a rough start, the stock soon picked up a remarkable head of steam, rumbling up to
US$42.17 on November 4, 2004, at which point I put out a sell on half
the position for a 46% gain. The second half is still going strong, with
current gains around 99%, as the stock trades at US$57.34.

It's set to open nine new stores over the second half of 2005, including a
huge 34,000 square foot store at 5th Avenue and 56th Street in New York in November and its first foray into Canada in late-2005, as well as a new store in Europe in 2006.

MMM

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