Dear Mr. Berko:

I need an apparel stock in my portfolio. Please give me your thoughts on Abercrombie & Fitch Co. My grandfather told me that in the 1920s and 1930s, he bought a very expensive shotgun and hunting rifle from them, plus high-class outdoor gear. What do you think?

D.R., Gainesville, Fla.

Dear D.R.:

Abercrombie & Fitch Co. (ANF-$27.16) opened its first store in 1892 and became America’s most unfailing and prestigious purveyor of rugged clothing, camping and outdoor gear. World renowned for outfitting Teddy Roosevelt’s various safaris, celebrated for its success provisioning Ernest Hemingway’s African hunting trips and equipping Adm. Richard Byrd’s expeditions to both poles, ANF’s gear was legend for its durability and dependability.

The company’s trademark has always been absolute and complete customer satisfaction. ANF became the most prominent name among the hoity-toity who had the leisure to visit King Solomon’s mines and the money to afford ANF’s safaris.

Among Abercrombie’s client base (they were not called customers) were Monaco’s Prince Rainier, Britain’s King George VI, princes from the oil-rich kingdoms of Kuwait, Saudi Arabia and Bahrain, Fidel Castro, U.N. Secretary General Kofi Anon, Ronald Reagan and the presidents of Argentina, Brazil, Peru, as well as many African potentates.

In 1992, a new management team repositioned ANF. The company began to retail fashionable upscale men’s, women’s and youth clothing and accessories, trading on its century-old name. It markets these items from its 350 Abercrombie & Fitch stores (mostly in malls), online and via its hip magazine called A&F Quarterly.

In 1998, ANF introduced a chain of stores called Abercrombie, which sell highly fashionable and provocative casual apparel for pubescent lads and lasses in the 7 to 14 age group. As of this January, the company had 164 of these stores. A related Web site, www.abercrombiekids.com, was introduced in 2000, which may be a bit much for some moms and dads.

The company’s newest concept is a 93-store chain called Hollisters. Inspired by a permissive California-oriented lifestyle, Hollisters targets high school students and its prices are a tad lower than traditional ANF stores.

Until 1996, ANF was division of The Limited. In September 1996, Goldman Sachs launched an initial public offering at $22 a share. At that time, ANF had 127 stores, revenues of $335 million, income of $25 million, a book value of 11 cents a share, a net profit margin of 7.4 percent and $49 million in debt. Today, ANF has 600 retail stores producing revenues of $1.8 billion, net income of $220 million, a book value of $9.65, a net profit margin of 11.9 percent and zero debt. This mid-cap company has a $2.65 billion market capitalization and 97 million shares outstanding.

In spite of the tough retail environment, ANF has registered excellent revenue growth. Though comparable-store sales have been in negative territory, US Bancorp Piper Jaffray rates ANF as “accumulate.” When consumer confidence improves, same-store sales will likely pick up as spending behavior returns to normal.

Still, Standard & Poor’s believes sales growth this year will be in the mid-teens, driven by 110 new units, including 70 Hollister stores. S&P reckons that gross margins will remain level and that improved outsourcing, better productivity and improved inventory control can give the shares a good push, despite weakness in the first quarter of this year.

ANF’s acceptably wicked and risque “wearables” have enormous appeal to young consumers. The clothing’s racy and suggestive appeal to their libidos encourages these youths to peel dollars from their purses and pull of their charge cards.

ANF’s five-year revenue growth of 25.1 percent is considered better than the industry’s five-year average of 13.2 percent. Its five-year earnings growth of 32.8 percent is nearly double the industry average of 16.5 percent, Other measures, including return on equity, indicate that management is doing better than its rivals.

Of the 28 suits on Wall Street who follow ANF, 10 rank the stock as a “hold” and 18 rank it as a “buy.” The bulls have a 12-month-high target price of $46 on expected 2004 earnings of $2.55 per share. Going out to 2007-08, Value Line expects ANF to earn $3.65 a share on $3 billion in revenues and projects a high price of $80 a share.

Good company. Good management. Good theme. Good financials. Good potential. Good marketing. Good buy!

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429. Visit Copley News Service at www.copleynews.com.