After Abercrombie & Fitch Co. (NYSE: AF) reported its earnings, investors might have thought the company was in the clear. However that is not what Merrill Lynch’s Lorraine Hutchinson said in her most recent report. In fact things might get worse for this fashion retailer in its turnaround before they get better.

The company just reported its fiscal first-quarter financial results of a net loss of $0.53 per share on $709 million in revenue. Thomson Reuters consensus estimates called for a net loss of $0.34 per share on $730.91 million in revenue.

Management identified additional costs savings and is now guiding to a $40 million decline in operational expenditures for 2015. As a result, Merrill Lynch lowered its 2015 earnings per share by $0.51 to $0.59, down 62% year over year, to reflect a lower sales and gross margin outlook, partly offset by new cost savings.

Merrill Lynch remains concerned about Abercrombie’s choppy international comparable sales and declining margin trends. The firm reiterated an Underperform rating with a price objective of $17, which implies a downside of about 25% from current prices.

In its report the brokerage firm stated:

1Q comp fell 8%, a modest improvement from -10% in 4Q14. Management indicated trends improved further in May. Abercrombie expects to drive sequential comp improvement in 2015 as the negative impact from reduced logo assortment wanes and its strategic initiatives kick in. Initiatives include an elevated store environment, omnichannel investments, a reinforced design team and improved assortment planning, new internal processes, and lower international pricing. We are modelling a -5% F2015 comp, which reflects improving sequential but still negative trends. While Abercrombie’s initiatives are a step in the right direction, we see risk to comp trends given waning relevance in the face of rising competition in the teen space and volatile international sales trends.

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Separately, the company launched lower pricing across its U.K. Hollister stores in the first quarter and saw a bump up in sales. Abercrombie plans to lower ticket prices across its European Hollister footprint in preparation for back-to-school sales.

Abercrombie’s narrowing international pricing premium is the result of waning enthusiasm for the brand and consumers’ aversion to paying such steep differentials, according to Merrill Lynch. The firm expects the international margin to continue to decline toward domestic levels.

Merrill Lynch stated its investment thesis as:

We expect Abercrombie’s margins to continue to move lower as currency, weak demand and a narrower pricing spread weigh on the profitable European division. The US business is showing signs of stabilization, with store closures and cost cuts helping to offset some margin pressure. However, headwinds remain for domestic teen retailers, including heightened competition and a weak fashion cycle.

Shares of Abercrombie were up 2.6% at $22.75 on Thursday afternoon. The stock has a consensus analyst price target of $21.54 on a 52-week trading range of $19.34 to $45.50.

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