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Lower prices may get teens back to Abercrombie: Pro

Abercrombie & Fitch is out to prove that it's nimble enough to adapt to the changing shopping environment—and Credit Suisse likes what it's hearing.

After years of the teen retailer's management citing the need to increase prices to restore its margins, Abercrombie management said in its fourth-quarter earnings call last week that it will be more competitive on pricing, particularly in regards to women's fashion and its lower-price Hollister brand.

In response, Credit Suisse on Tuesday upgraded the retailer to "outperform" from "neutral," raising its 12-month price target $16 to $52. Abercrombie shares are currently trading around $41, after rising about 6 percent on the day.

Pedestrians are reflected in the window of an Abercrombie & Fitch store in San Francisco.
Getty Images
Pedestrians are reflected in the window of an Abercrombie & Fitch store in San Francisco.

"The big news ... is that the company is finally addressing a premium pricing strategy that has exacerbated challenging underlying demand conditions," Credit Suisse analyst Christian Buss wrote. "We ultimately expect Abercrombie to be able to recapture share given our view that core consumers do still have a [modest] preference for the Abercrombie & Fitch and Hollister brands when those prices are appropriate."

(Read more: The worst isn't over—5 musts for retail investors)

The change in pricing is just one of the initiatives Abercrombie has revealed as of late, as it struggles to compete with low-cost teen retailers such as Forever 21 and H&M. Earlier this year, the company separated the roles of CEO and chairman, and added three retail veterans to its board. Analysts reacted positively to the move, saying it showed Abercrombie's willingness to accept change.

In its earnings call last week, the retailer said that it is considering selling third-party brands as well as selling its merchandise through third-party channels. It currently sells Keds products on its Hollister website, an initiative that started in August 2013 and which CEO Mike Jeffries called "very successful."

In addition to new products coming from Keds, Jeffries said the retailer is working on a long list of collaborations across footwear, apparel and accessories. Michael Scheiner, the company's director of marketing and PR, said it is exploring these opportunities at both Hollister and Abercrombie. Expected to launch in coming months, this would mark a significant shift in the retailer's strategy.

"We know our target customer values these sorts of relationships, and we believe they can improve our brand positioning, while driving incremental sales and margin," Jeffries said on the company's earnings call.

(Read more: Traders think it'll get way worse for Abercrombie)

Despite these moves, many analysts remain on the sidelines about Abercrombie. Wells Fargo analyst Paul Lejuez, who has a "hold" rating on the retailer, pointed to troubles overseas, where he said Abercrombie's profit per square foot was down more than 40 percent in the recent quarter.

Stifel Nicolaus analyst Richard Jaffe also has a "hold" rating on the retailer. He cited a 23 percent increase in inventory per square foot as troublesome, as it will require significant markdowns in the first quarter.

But Credit Suisse's Buss called attention to the retailer's new cost savings initiative, an increased emphasis on returning cash to shareholders and a continued focus on shrinking its U.S. square footage, as positives.

In the fourth quarter, Abercrombie reported net income of $104.3 million, excluding items, on earnings per share of $1.34. Despite a 21 percent increase in its direct-to-consumer segment, comparable-store sales continued to slide, logging an 8 percent quarterly decline.

Separately, struggling retailer J.C. Penney also made headlines on Monday night, as Standard & Poor's raised the discount department store's CCC+ credit rating to "stable" from "negative," citing modest improvements in the fourth quarter.

(Read more: Abercrombie moves may show openness to buyout: Analysts)

"We forecast that the company will demonstrate modest sequential gains over the next few quarters," the ratings agency said, naming projected increases in gross domestic product and consumer spending as well as positive same-store sales, as catalysts.

For the fourth quarter, Penney's comparable-store sales rose 2 percent. It marked the retailer's first same-store sales gain in more than two years.

—By CNBC's Krystina Gustafson. Follow her on Twitter @KrystinaGustafs.

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