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Abercrombie (ANF) Down 6.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research logoZacks Equity Research 12/29/2018 Zacks Equity Research

It has been about a month since the last earnings report for Abercrombie & Fitch (ANF). Shares have lost about 6.3% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Abercrombie due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Abercrombie Q3 Earnings Beat, Provides Solid Holiday View

Abercrombie & Fitch reported solid third-quarter fiscal 2018 results, wherein both top and bottom lines beat estimates. This marked the company’s sixth consecutive quarter of positive earnings surprise while sales topped estimates in six out of the last seven quarters. Additionally, earnings improved year over year in the fiscal third quarter, though sales were almost flat.

Q3 Earnings & Sales

Abercrombie posted adjusted earnings of 33 cents per share, beating the Zacks Consensus Estimate of 18 cents and improving 10% from 30 cents earned in the year-ago quarter. On a reported basis, the company delivered earnings per share of 35 cents compared with 15 cents in the year-ago period.

Bottom-line results gained from a solid increase in comps, stabilization in gross margin rate and expense leverage, which reflect successful execution of the company’s plans. Further, currency tailwinds of roughly 5 cents per share (net of hedging) aided results.

Net sales of $861.2 million surpassed the Zacks Consensus Estimate of $854 million and remained almost flat from the year-ago quarter’s sales of $859.1 million. During the fiscal third quarter, calendar shift and currency movements adversely impacted sales by nearly 2%, and 1%, respectively.

Brand-wise, net sales improved 1% to $515.1 million at Hollister while sales for the Abercrombie brand dipped 1% to $346.1 million. From a geographical viewpoint, net sales grew 1% in the United States and dropped 2% in international markets.

Nonetheless, the direct-to-consumer (DTC) business continued to perform well, backed by robust digital momentum across both brands and geographies. Notably, DTC sales surged 16% and accounted for nearly 28% of total sales compared with 24% last year.

Comps in Detail

Comps increased 3% in the fiscal third quarter. Brand-wise, Hollister, and Abercrombie posted comps growth of 4% and 1%, respectively. Notably, this marked the fifth consecutive quarter of comps growth for the company as well as the eighth straight quarter of positive comps for Hollister and the fourth for Abercrombie.

Comps growth was mainly driven by strong performance in the United States, where comps improved 6%. This was partly offset by 3% comps decline in international markets.

Margins

Gross margin of 61.3% in the fiscal third quarter was flat with the prior-year quarter. However, gross profit margin declined 40 basis points (bps) on a constant-currency basis due to marginal increase in average unit costs.

Abercrombie reported adjusted operating income of $36.7 million, reflecting a decline of 1.6% from the prior-year quarter. Adjusted operating margin of 4.3% was essentially flat with last year.

Other Financials

Abercrombie ended the quarter with cash and cash equivalents of $520.5 million and gross borrowings under its term-loan agreement of $253.3 million. As of Nov 3, 2018, inventories were $572.2 million, nearly flat with the prior-year period.

Moreover, the company has returned about $109 million to shareholders through share buybacks and dividends year to date. It bought back 1.2 million shares in the fiscal third quarter and 2.9 million shares year to date. As of Nov 3, 2018, the company had about 3.6 million shares available for purchase under its current authorization.

At the end of the fiscal fourth quarter, the company expects inventory to be flat to up low-single digit as it leverages ongoing transformation initiatives to improve long-term inventory productivity.

Store Update

In the fiscal third quarter, the company delivered 28 new store experiences, including 11 store openings, five right-sizing and 12 remodels.

Management expects to deliver about 70 new store experiences in fiscal 2018, which include new store prototypes, remodeled stores and right-sizes. Moreover, it now expects to shut down fewer stores in fiscal 2018 due to improved performance and lease negotiations. The company anticipates about 40 store closures in the fiscal year, mostly in the United States, compared with 60 closures expected earlier.

Outlook

Abercrombie notes that the momentum witnessed in the fiscal third quarter continued into the fourth quarter, reflected by a robust performance at the start of the holiday season — during the period from Thanksgiving to Cyber Monday. In November, the company witnessed strong double-digit growth on singles day on T-Mall and record sales during the aforementioned holiday period.

Consequently, the company expects to deliver on its previously stated outlook for fiscal 2018. It anticipates strong top-line growth, gross margin expansion and operating expense leverage in fiscal 2018. The company also outlined its view for the fiscal fourth quarter.

For the fiscal fourth quarter, the company anticipates sales to decline in a mid-single digit. This includes an adverse impact of nearly $60 million from the additional week in fiscal 2017 and about $15 million from negative currency translations. Comps are anticipated to grow in a low-single digit. Gross margin is likely to be flat or up slightly from the fiscal 2017 level of 58.4%.

Operating expenses (excluding other operating income) are estimated to decline 1-2% from adjusted operating expenses of $561 million in fiscal 2017. The decline is likely to stem from lower expenses due to the calendar shift and absence of 2017's extra 53rd week related foreign currency rates alongside reduced compensation expenses. This will be partly negated by continued investments in marketing and transformation initiatives. Other operating income is anticipated to be $2 million, with effective tax rate in the mid-to-upper 20s range.

For fiscal 2018, the company continues to estimate both comps and sales to be up 2-4%. Favorable foreign currency rate is expected to contribute nearly $10 million to net sales. However, loss of an additional week is expected to hurt sales by $40 million in fiscal 2018.

The company expects gross margin to improve slightly from 59.7% recorded in fiscal 2017. The upside will stem from higher average unit retail, including currency gains, reduced promotions and a slight decline in average unit costs.

GAAP operating expenses are now expected to increase nearly 2% from $2 billion adjusted operating expenses recorded in fiscal 2017. Earlier, the company projected a 2.5% increase. Adjusted operating expenses are likely to increase 1.5%. Furthermore, the company expects effective tax rate to be in the mid-to-upper 30s range.

Additionally, the company envisions capital expenditure of roughly $145 million for fiscal 2018, marking an increase from $135-$140 million stated earlier. This will include $90 million for store updates and new stores, and nearly $55 million for direct-to-consumer and omni-channel investments, information technology and other projects.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

At this time, Abercrombie has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Abercrombie has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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