- Abercrombie & Fitch Co's (ANF.N) recent clearance activity with compelling discounts is leading to increased store traffic and sales, said FBR Capital Markets, while upgrading the apparel retailer a notch to "outperform."

Abercrombie & Fitch

The company has taken a bad hit in recent months as its strategy of keeping prices higher than competitors did not go down well with thrifty U.S. shoppers, although the retailer discounted clearance items.

It finally gave in to market demands and lowered prices mid-May after its first-quarter loss came in much below market estimates.

"Beginning in mid-May, clearance signage went up at all concepts; this time (unlike the early April clearance activity), the signage was far more pronounced, and the discounts offered were far more compelling," analyst Adrienne Tennant wrote in a note to clients.

Tennant narrowed May comparable sales estimate for the company -- expecting a drop of 20 percent, compared with her prior view of a drop of 28 percent.

While discounting is still a threat to margins, the company's promotional philosophy should stem ongoing market share losses, Tennant said.

Abercrombie, which runs its namesake stores and other chains such as Hollister Co and Gilly Hicks, has also brought in more "fashion-right" styles, correcting its prior inventory and generating more interest among shoppers, the analyst said.

The chain has been facing stiff competition from trendier names like Forever 21 or H&M (HMb.ST), as teens move away from the casual look.

Shares of Abercrombie closed at $30.11 Friday 29 May on the New York Stock Exchange.

(Reporting by Nivedita Bhattacharjee in Bangalore; Editing by Ratul Ray Chaudhuri)