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Casual apparel retailer Abercrombie & Fitch Co. (ANF - Analyst Report) posted second-quarter 2013 earnings per share of 16 cents, a 20% decline from 20 cents earned in the year-ago quarter. Moreover, the earnings missed the Zacks Consensus Estimate of 28 cents by nearly 43%.

Including one-time charges related to the implementation of the ongoing profit initiative, earnings came in at 14 cents.

Lower-than-expected results were due to poor performance of the business catering to women’s fashion needs and reduced traffic volume.

Quarter in Detail

Abercrombie’s net sales for the quarter declined marginally to $945.7 million from $951.4 million in the year-ago quarter, primarily due to weak performance in the domestic market, partially offset by robust sales abroad. Moreover, the quarterly revenue missed the Zacks Consensus Estimate of $998.0 million.

The decrease in total sales reflects a decline of 8% in total domestic sales (including direct-to-consumer sales) to $597.3 million, which was partially offset by an increase of 15% in international business (including direct-to-consumer sales) to $348.4 million.

Overall, direct-to-consumer sales increased 21% year over year to $154.3 million. Including direct-to-consumer sales, the company’s total comparable-store sales (comps) decreased 10%. Abercrombie’s comps, including direct-to-consumer sales in the U.S declined 11%, while internationally it declined 7%.

Brand-wise, Abercrombie’s comparable sales including direct-to-consumer sales at its Abercrombie & Fitch, abercrombie kids and Hollister stores declined 6%, 3% and 13%, respectively. The company’s Abercrombie & Fitch, abercrombie kids and Hollister brands generated revenues of $356.6 million, $76.0 million and $488.5 million, respectively.

In the quarter, gross margin improved 160 basis points (bps) to 63.9%. The expansion in gross margin was primarily driven by lower cost of goods sold, partly offset by lower sales.

Stores and distribution expenses, as a percentage of sales, increased 180 bps to 49.9% from the prior-year period, primarily due to lower comps and higher direct-to-consumer costs, partly offset by expense leverage obtained from store payroll, store management and support as well as other stores and distribution costs.

Moreover, marketing, general and administrative expenses as a percentage of sales rose 70 bps to 12.4% due to enhanced consulting and other services, including charges pertaining to the implementation of the profit improvement endeavor.

Balance Sheet

Abercrombie ended the quarter with cash and cash equivalents of $335.0 million and shareholders’ equity of $1,683.7 million. As of Aug 3, 2013, inventories were approximately $633.5 million.

Share Repurchase and Dividend Update

In the quarter, Abercrombie bought back 2 million shares at an average cost of $99.5 million.

Further, on Aug 20, 2013, the company’s board of directors announced a quarterly cash dividend of 20 cents per share payable on Sep 17, 2013 to shareholders of record as of Sep 3, 2013.    

Store Update

During the quarter, the company opened 4 international Hollister stores. Further, the company launched a combined Abercrombie & Fitch and abercrombie kids store in both the U.K. and the U.S. The company ended the quarter with a total of 1,057 stores, including 285 Abercrombie & Fitch stores, 150 abercrombie kids stores, 594 Hollister Co. stores and 28 Gilly Hicks stores.

Sneak Peek into Fiscal 2013

Based on assumption of lower comps in the third quarter, Abercrombie projected its third-quarter 2013 earnings guidance range to be 40-45 cents per share.

During the fiscal, Abercrombie intends to open a flagship store in Seoul and nearly 20 international Hollister stores. It also plans to shut down 40–50 domestic stores. The company anticipates capital expenditure of approximately $200.0 million towards new store openings and other planned expenditures in fiscal 2013.

Other Stocks to Consider

Currently, Abercrombie carries a Zacks Rank #3 (Hold). Better performing stocks in the apparel retail industry include The Gap, Inc. (GPS - Analyst Report), The Children (PLCE - Snapshot Report) and DSW Inc. (DSW - Snapshot Report). All of them carry a Zacks Rank #2 (Buy).

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