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Merrill Lowers Abercrombie & Fitch to 'Neutral'

Merrill Lynch downgraded Abercrombie & Fitch (ANF) to neutral from buy.

Analyst Mark Friedman says November comparisons are well below his estimate. He notes Hollister comparisons are negative for the second month, and he's concerned as this brand, which is targeted towards youth, is the company's growth vehicle. Friedman thinks the retailer will need to take deeper markdowns at the season's end, thus there's risk to his estimates, which assumes at least some sales turnaround.

Friedman says the bigger picture here, however, is what is ailing A&F: Is it Hollister cannibalization? Competition? Saturation? He thinks it's a combination of all three, and it's likely that the brand is stale and needs updating.

Friedman cut the $2.13 fiscal 2004 (Jan.) earnings per share estimate to $2.04, and cut the $2.50 fiscal 2005 estimate to $2.30.

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