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Why Is Abercrombie (ANF) Up 1.2% Since Last Earnings Report?
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A month has gone by since the last earnings report for Abercrombie & Fitch (ANF - Free Report) . Shares have added about 1.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Abercrombie due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Abercrombie Q4 Earnings & Sales Miss, High Costs
Abercrombie posted fourth-quarter fiscal 2021 results, wherein both top and bottom lines missed the Zacks Consensus Estimate. Also, earnings declined year over year, while sales improved. Results were mainly impacted by inventory delays due to supply-chain headwinds during the holiday season, as well as the surge in Omicron cases.
Overall Sales & Earnings Picture
Abercrombie delivered adjusted earnings of $1.14 per share in fourth-quarter fiscal 2021 that missed the Zacks Consensus Estimate of $1.28 and declined 24% from $1.50 earned in the year-ago quarter. The year-over-year decline in the bottom line can be attributed to inventory delays during the peak holiday season and the surge in Omicron cases, which led to soft sales trends in the quarter. Moreover, margins in the quarter were impacted by higher freight costs due to supply-chain woes and increased operating expenses related to elevated payroll and marketing expenses.
Net sales of $1,161.4 million advanced 4% year over year but lagged the Zacks Consensus Estimate of $1,180 million. However, sales declined 2% from the comparable fiscal 2019 period. Digital net sales rose 17% to $556 million, and represented 48% of total sales. Sales in the quarter were mainly impacted by unexpected inventory delays for the peak holiday selling period, primarily impacting Hollister and Gilly Hicks.
However, the company noted that average unit retail (AUR) improved across all brands, regions and channels due to reduced promotions, markdowns and clearance activity. This marked the seventh consecutive quarter of AUR growth for the company.
Sales By Region and Brands
Sales were strong in the United States, up 7% year over year to $841.7 million. However, International sales declined 4% to $319.7 million, owing to lower sales in the EMEA and APAC regions, mainly because of the disruptions from COVID-related lock-downs and restrictions. Compared with fourth-quarter fiscal 2019, sales in the United States improved 3%, while international sales were down 14%. Sales in the EMEA region fell 4% year over year to $226.1 million. The company witnessed increased impacts in the U.K. through most of the quarter, while the Netherlands and Austria continued to experience COVID-related closures. In APAC, sales declined 21% to $46.2 million.
Brand wise, net sales at Hollister advanced 2% year over year to $668.8 million, while at Abercrombie, sales increased 6% to $492.6 million.
Margins
Gross profit dipped 0.3% year over year to $677.1 million. The gross margin contracted 220 basis points (bps) to 58.3%. However, the gross margin improved 10 bps compared with fourth-quarter fiscal 2019. In the quarter, the company witnessed $80 million (700 bps) of increase in freight costs, which was more than offset by higher AUR growth across brands and channels.
Operating expenses, excluding other operating income, increased 5.4% from the year-ago period to $581 million. The year-over-year increase was driven by higher payroll and marketing expenses, partially offset by a decline in store occupancy expenses. Operating expenses also declined 2.7% from fourth-quarter fiscal 2019. The decline versus fourth-quarter fiscal 2019 was driven by investments in marketing, increased digital fulfillment expenses and higher incentive-based compensation, partially offset by savings in store-related expenses.
As a percentage of sales, operating expenses of 50.2% declined 30 bps from 50.5% in the prior-year quarter, while it increased 230 bps from 47.9% in fourth-quarter fiscal 2019.
Adjusted operating income totaled $100 million, down 23.7% from $131.5 million in the year-ago quarter. We note that the operating margin expanded 310 bps to 8.6%.
Other Financials
Abercrombie ended fiscal 2021 with cash and cash equivalents of $823.1 million, long-term gross borrowings of $303.6 million, and stockholders’ equity of $826.1 million, excluding non-controlling interests. The company had liquidity of $1.1 billion at the end of fiscal 2021, including cash and cash equivalents and available borrowings of $248 million under the ABL Facility. Net cash provided by operating activities was $274 million for fiscal 2021.
In fiscal 2021, the company spent $97 million toward capital expenditure, of which one-third was allocated to stores and the remainder for digital technology and maintenance needs. For fiscal 2022, the company anticipates a capital expenditure of $150 million.
In the quarter under review, the company repurchased 4.1 million shares for $142 million. It repurchased 10.2 million shares for $377 million in fiscal 2021. The company now has $358 million remaining under its share repurchase authorization announced in November 2021.
Store Update
In the fiscal fourth quarter, Abercrombie opened 15 stores and closed 21 stores. This brings the total store openings to 38 and store closures to 44 in fiscal 2021. As of Jan 29, 2022, the company’s total store base was 729, including 524 stores in the United States and 205 stores internationally.
Outlook
For first-quarter fiscal 2022, management envisions net sales growth in the low-single digits from the first-quarter fiscal 2021 level of $781 billion. Abercrombie expects the gross profit rate to decline 400 bps year over year compared with the first-quarter fiscal 2021 reported rate of 63.4%. The guidance takes into account incremental adverse impacts of about $65 million of freight cost pressure compared with the prior year. This is likely to be partly offset by an increase in AUR. The company anticipates operating expenses, excluding other operating income, to increase 6% from the adjusted operating income of $436 million reported in first-quarter fiscal 2021. Abercrombie expects to deliver operating margin above the pre-pandemic levels in the fiscal first quarter, as it has evolved its gross margin and expense structure to absorb a significant portion of the pressures from higher levels of inflation.
For fiscal 2022, the company anticipates net sales growth of 2.4% from $3.7 billion reported in fiscal 2021. It expects the United States to continue outperforming the EMEA and APAC regions. However, it is cautiously optimistic about the trends in these regions as COVID restrictions continue to be updated. The gross margin is expected to decline 200 bps from 62.3% in fiscal 2021. The company expects freight and raw material inflation of 300-400 bps in fiscal 2022, with most freight expenses weighted in the first half and raw materials in the second half. The company expects to partly offset these headwinds with higher AUR, driven by a rise in selected tickets and a continued decline in promotions. Abercrombie anticipates operating expenses, excluding other income, to increase in a range similar to sales, suggesting an increase of 2-4% from the fiscal 2021 reported level. The company expects an effective tax rate in the high 20% range for fiscal 2022. Considering the above-mentioned expectations, management expects an operating margin of 7-8% for fiscal 2022.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
The consensus estimate has shifted -82.78% due to these changes.
VGM Scores
Currently, Abercrombie has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Abercrombie has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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Why Is Abercrombie (ANF) Up 1.2% Since Last Earnings Report?
A month has gone by since the last earnings report for Abercrombie & Fitch (ANF - Free Report) . Shares have added about 1.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Abercrombie due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Abercrombie Q4 Earnings & Sales Miss, High Costs
Abercrombie posted fourth-quarter fiscal 2021 results, wherein both top and bottom lines missed the Zacks Consensus Estimate. Also, earnings declined year over year, while sales improved. Results were mainly impacted by inventory delays due to supply-chain headwinds during the holiday season, as well as the surge in Omicron cases.
Overall Sales & Earnings Picture
Abercrombie delivered adjusted earnings of $1.14 per share in fourth-quarter fiscal 2021 that missed the Zacks Consensus Estimate of $1.28 and declined 24% from $1.50 earned in the year-ago quarter. The year-over-year decline in the bottom line can be attributed to inventory delays during the peak holiday season and the surge in Omicron cases, which led to soft sales trends in the quarter. Moreover, margins in the quarter were impacted by higher freight costs due to supply-chain woes and increased operating expenses related to elevated payroll and marketing expenses.
Net sales of $1,161.4 million advanced 4% year over year but lagged the Zacks Consensus Estimate of $1,180 million. However, sales declined 2% from the comparable fiscal 2019 period. Digital net sales rose 17% to $556 million, and represented 48% of total sales. Sales in the quarter were mainly impacted by unexpected inventory delays for the peak holiday selling period, primarily impacting Hollister and Gilly Hicks.
However, the company noted that average unit retail (AUR) improved across all brands, regions and channels due to reduced promotions, markdowns and clearance activity. This marked the seventh consecutive quarter of AUR growth for the company.
Sales By Region and Brands
Sales were strong in the United States, up 7% year over year to $841.7 million. However, International sales declined 4% to $319.7 million, owing to lower sales in the EMEA and APAC regions, mainly because of the disruptions from COVID-related lock-downs and restrictions. Compared with fourth-quarter fiscal 2019, sales in the United States improved 3%, while international sales were down 14%. Sales in the EMEA region fell 4% year over year to $226.1 million. The company witnessed increased impacts in the U.K. through most of the quarter, while the Netherlands and Austria continued to experience COVID-related closures. In APAC, sales declined 21% to $46.2 million.
Brand wise, net sales at Hollister advanced 2% year over year to $668.8 million, while at Abercrombie, sales increased 6% to $492.6 million.
Margins
Gross profit dipped 0.3% year over year to $677.1 million. The gross margin contracted 220 basis points (bps) to 58.3%. However, the gross margin improved 10 bps compared with fourth-quarter fiscal 2019. In the quarter, the company witnessed $80 million (700 bps) of increase in freight costs, which was more than offset by higher AUR growth across brands and channels.
Operating expenses, excluding other operating income, increased 5.4% from the year-ago period to $581 million. The year-over-year increase was driven by higher payroll and marketing expenses, partially offset by a decline in store occupancy expenses. Operating expenses also declined 2.7% from fourth-quarter fiscal 2019. The decline versus fourth-quarter fiscal 2019 was driven by investments in marketing, increased digital fulfillment expenses and higher incentive-based compensation, partially offset by savings in store-related expenses.
As a percentage of sales, operating expenses of 50.2% declined 30 bps from 50.5% in the prior-year quarter, while it increased 230 bps from 47.9% in fourth-quarter fiscal 2019.
Adjusted operating income totaled $100 million, down 23.7% from $131.5 million in the year-ago quarter. We note that the operating margin expanded 310 bps to 8.6%.
Other Financials
Abercrombie ended fiscal 2021 with cash and cash equivalents of $823.1 million, long-term gross borrowings of $303.6 million, and stockholders’ equity of $826.1 million, excluding non-controlling interests. The company had liquidity of $1.1 billion at the end of fiscal 2021, including cash and cash equivalents and available borrowings of $248 million under the ABL Facility. Net cash provided by operating activities was $274 million for fiscal 2021.
In fiscal 2021, the company spent $97 million toward capital expenditure, of which one-third was allocated to stores and the remainder for digital technology and maintenance needs. For fiscal 2022, the company anticipates a capital expenditure of $150 million.
In the quarter under review, the company repurchased 4.1 million shares for $142 million. It repurchased 10.2 million shares for $377 million in fiscal 2021. The company now has $358 million remaining under its share repurchase authorization announced in November 2021.
Store Update
In the fiscal fourth quarter, Abercrombie opened 15 stores and closed 21 stores. This brings the total store openings to 38 and store closures to 44 in fiscal 2021. As of Jan 29, 2022, the company’s total store base was 729, including 524 stores in the United States and 205 stores internationally.
Outlook
For first-quarter fiscal 2022, management envisions net sales growth in the low-single digits from the first-quarter fiscal 2021 level of $781 billion. Abercrombie expects the gross profit rate to decline 400 bps year over year compared with the first-quarter fiscal 2021 reported rate of 63.4%. The guidance takes into account incremental adverse impacts of about $65 million of freight cost pressure compared with the prior year. This is likely to be partly offset by an increase in AUR. The company anticipates operating expenses, excluding other operating income, to increase 6% from the adjusted operating income of $436 million reported in first-quarter fiscal 2021. Abercrombie expects to deliver operating margin above the pre-pandemic levels in the fiscal first quarter, as it has evolved its gross margin and expense structure to absorb a significant portion of the pressures from higher levels of inflation.
For fiscal 2022, the company anticipates net sales growth of 2.4% from $3.7 billion reported in fiscal 2021. It expects the United States to continue outperforming the EMEA and APAC regions. However, it is cautiously optimistic about the trends in these regions as COVID restrictions continue to be updated. The gross margin is expected to decline 200 bps from 62.3% in fiscal 2021. The company expects freight and raw material inflation of 300-400 bps in fiscal 2022, with most freight expenses weighted in the first half and raw materials in the second half. The company expects to partly offset these headwinds with higher AUR, driven by a rise in selected tickets and a continued decline in promotions. Abercrombie anticipates operating expenses, excluding other income, to increase in a range similar to sales, suggesting an increase of 2-4% from the fiscal 2021 reported level. The company expects an effective tax rate in the high 20% range for fiscal 2022. Considering the above-mentioned expectations, management expects an operating margin of 7-8% for fiscal 2022.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
The consensus estimate has shifted -82.78% due to these changes.
VGM Scores
Currently, Abercrombie has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Abercrombie has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.