Abercrombie & Fitch Disappoints in Q3, Cuts Fiscal '14 View

Abercrombie & Fitch Co. (ANF) reported mixed results in the third quarter of fiscal 2014 with both top and bottom lines falling year over year, while its earnings per share managed to beat the Zacks Consensus Estimate. The company’s adjusted earnings of 42 cents per share came a penny ahead of the Zacks Consensus Estimate, whereas it fell 19.2% year over year.

Abercrombie & Fitch Co - Earnings Surprise | FindTheBest

Including certain one-time items, Abercrombie posted earnings of 25 cents per share contrary to a loss of 20 cents per share in the previous year.

Sales and Comps

Battered by sluggish consumer traffic, especially in the European stores, the company’s net sales for the quarter ended Nov 1, 2014, descended nearly 12% to $911.4 million, compared with the same period last year. Another factor accountable for weak sales was a fall in heavy logo products sales, due to the changing consumer trends. Moreover, the quarterly revenue fell short of the Zacks Consensus Estimate of $917 million.

The fall in net sales reflects a 12% decline in both total domestic and international sales, including direct-to-consumer sales, to $594 million and $317 million, respectively.

Including direct-to-consumer sales, the company’s total comparable-store sales (comps) decreased 10%. Although U.S. and international comps declined 7% and 15%, respectively, total direct-to-consumer comps rose 8%. Comps in the months of September and October remained extremely weak, when compared with August, leading to disappointing sales.

Excluding direct-to-consumer sales, the company’s total comps declined 14%. The plunge in comps mainly resulted from a 10% downside in U.S. comps and a 22% decline in International comps.

Brand-wise, Abercrombie’s comparable sales including direct-to-consumer sales at its Abercrombie & Fitch, abercrombie kids and Hollister stores declined 6%, 10% and 12%, respectively. The company’s Abercrombie & Fitch, abercrombie kids and Hollister brands generated revenues of $358.4 million, $81.3 million and $468.1 million, respectively.

Quarter in Detail

In the third quarter, gross margin contracted 80 basis points (bps) to 62.2%, primarily due to increased promotional activities that resulted in a decline in average unit retail, offset in part by lower average unit costs.

Adjusted store and distribution expenses, as a percentage of sales, contracted 140 bps to 45.1%, compared with the prior-year period, primarily due to savings from its profit enhancement initiative that helped to lower store payroll and other manageable store expenses. This was partially offset by increased direct-to-consumer expenses.

Moreover, adjusted marketing, general and administrative expenses dipped nearly 13.6% to $103.8 million because of a fall in compensation expenses, offset by a rise in marketing costs. Marketing, general and administrative expenses included charges of about $1.2 million related to the ongoing profit enhancement initiative.

Financials

Abercrombie ended the quarter with cash and cash equivalents of $320.6 million, gross borrowings of $300 million and shareholders’ equity of $1,395 million. As of Nov 1, 2014, inventories were approximately $617.5 million, down nearly 19.7% from the prior-year quarter.

Further, the company continued to enhance shareholder value by repurchasing about 2 million shares valued at $75 million. Shares available for repurchase under the company’s authorization were approximately 9 million as of Nov 1, 2014.

The company also declared a quarterly dividend of 20 cents per share, to be paid on Dec 10, 2014, to shareholders of record as of Dec 2, 2014.

Store Update

The company ended the quarter with a total of 1000 stores, including 834 stores in the United States and 166 stores across Canada, Europe, Asia, Australia and the Middle East. During the quarter, the company opened 2 stores in the U.S. and 5 stores globally. Additionally, the company closed 4 stores across the U.S.

Outlook

Following a weak third quarter and based on soft comps and gross margin projections for the fourth quarter, Abercrombie & Fitch lowered its outlook for fiscal 2014. Abercrombie now expects fiscal 2014 earnings to be in the range of $1.50–$1.65 per share compared with the previous guidance of $2.15–$2.35 per share.

The company’s revised earnings forecast assumes fourth-quarter comps to decline in the mid-to-high single digit percentage range, while gross margin is anticipated to rise year over year but fall below the third quarter year-to-date rate. However, the guidance excludes any charges related to the Gilly Hicks brand restructuring, the ongoing profit improvement initiative, some corporate governance matters, other potential impairments and store closures.

Moreover, the company expects effective tax rate for the year to be in the upper-30s range, depending upon the mix between domestic and international income.

During fiscal 2014, Abercrombie intends to open about 12 full-price international outlets, comprising 4 Abercrombie & Fitch and 7 Hollister stores. Moreover, the company plans to open about 9 international and U.S. outlet stores during the fiscal. Store closures in the U.S., due to lease expirations, are expected to come at about 60, during fiscal 2014.

The company now anticipates capital expenditure of nearly $200 million in fiscal 2014 compared with its previous expectation of $210–$220 million.

Though management is disappointed with the third-quarter results, it continues to undertake strategic initiatives to bring about improvements during the fourth quarter and in the long run.

The company’s intent is to remain focused on developing a branded structure, shutting down underperforming stores, investing in direct-to-consumer and Asian operations, enhancing marketing efforts, curtailing costs and realigning products, parallel to consumer preference. With these efforts underway, Abercrombie & Fitch is likely to witness growth in the future.

Other Stocks to Consider

Abercrombie & Fitch currently holds a Zacks Rank #4 (Sell). Some better-ranked stocks in the same industry include American Eagle Outfitters Inc. (AEO), Foot Locker Inc. (FL) and Zumiez Inc. (ZUMZ), all carrying a Zacks Rank #2 (Buy).

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Read the Full Research Report on AEO
Read the Full Research Report on FL


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