Abercrombie & Fitch Co. (ANF Quick QuoteANF - Free Report) reported another dismal quarter as fourth-quarter 2016 earnings and sales fell short of expectations and declined year over year. The soft quarterly performance can be attributed to the tough retail environment due to heightened promotional activity during the holiday season. This also led the company to deliver a lower-than-expected gross margin rate. Further, results continued to be impacted by adverse currency exchange rates, which hurt sales by nearly $16 million and earnings by 5 cents per share.

However, the company’s shares gained nearly 14% on Mar 2, primarily backed by the solid performance of Hollister brand, renewed strength in the Abercrombie brand and robust direct-to-customer sales. Further, a positive comparable store sales (comps) growth guidance for fiscal 2017 drove investor sentiments.

Overall, Abercrombie & Fitch has underperformed the broader industry in the last six months. The Abercrombie stock delivered negative returns of 20.9% in the last six months, while the Zacks categorized Retail–Apparel/Shoe industry decreased 13.2%.

Quarter in Detail

Coming to the numbers, Abercrombie’s adjusted earnings per share of 71 cents in the fourth quarter lagged the Zacks Consensus Estimate of 76 cents and declined 34.3% from the prior-year quarter adjusted earnings of $1.08.

Including certain one-time items, Abercrombie reported earnings per share of 71 cents compared with 85 cents per share in the year-ago quarter.

Net sales were down nearly 6.9% year over year to $1,036.4 million and missed the Zacks Consensus Estimate of $1,045 million. The decline reflects 8% drop in domestic sales to $688.2 million and 5% lower international sales to $348.2 million. Additionally brand-wise, sales for Abercrombie fell 13% to $442.4 million while sales at Hollister declined 2% to $594 million.

However, net sales benefited from a 31% contribution from direct-to-consumer and omni-channel businesses in the reported quarter.

Comps slipped 5%, owing to lower traffic, particularly at its namesake brand’s flagship and tourist locations. However, comps reflected a modest improvement from the prior quarter.

Comps for the Abercrombie brand declined 13%, while Hollister comps were a surprise package registering a 1% growth. While the comps decline at the Abercrombie brand signals that the recovery is still away, a sequential improvement in the brand’s comps definitely reflects that the company’s efforts to renew this brand are on track. Further, we are encouraged by the improvement in Hollister comps, which marks the brand’s first positive comps in the past year.

Regionally, the company delivered comps decline of 6% in the U.S. and 4% decline on the international front. However, direct-to-consumer comps improved in both the U.S. and in international markets.

Adjusted gross margin contracted 90 basis points in constant currency to 59.3%, mainly due to lower average unit retail, partly offset by lower average unit costs. Additionally, a promotional retail environment during the holiday season impacted gross margins.

Financials

Abercrombie ended fiscal 2016 with cash and cash equivalents of $547.2 million, long-term borrowings of $263 million, and shareholders’ equity of $1,252 million. As of Jan 28, 2017, inventories were $399.8 million, down nearly 8.4% from the prior-year period.

On Feb 15, management declared a quarterly cash dividend of 20 cents per share, payable on Mar 13, to shareholders on record as of Mar 3.

Store Update

During the fiscal fourth quarter, the company introduced seven stores in the U.S., including six namesake and one Hollister store. These comprised of two domestic and four international namesake stores, as well as one international Hollister store. The company also closed a total of 39 stores in the quarter, including 38 domestic and one international store. Store closures comprised of 24 domestic and one international domestic store, alongside 14 domestic Hollister stores.

With this, the company operated 709 stores in the U.S. and 189 stores across Canada, Europe, Asia and the Middle East, as of Jan 28, 2017.

In fiscal 2016, the company has opened a total of 20 stores, including eight in the U.S. and 12 internationally. Further, the company has shut 54 stores in the fiscal, including 53 domestic and one international store.

In fiscal 2017, the company plans to open six full-price stores, comprising four in the U.S. and two in international regions. Additionally, the company plans to inaugurate two new outlet stores. Apart from this, the company intends to pull down shutters on approximately 60 stores in the U.S. in the fiscal through natural lease expirations.

Outlook

After a dismal end to fiscal 2016, the company anticipates the environment to remain challenging in fiscal 2017. However, owing to expectations of continued strength in Hollister brand and improvement in Abercrombie throughout 2017 due to the ongoing initiatives, the company expects comps to improve in fiscal 2017. Nonetheless, it expects comps to remain challenging in first-half fiscal 2017.

Further, it expects foreign currency headwinds to hurt sales and operating income in fiscal 2017 to the tune of $55 million and $25 million, respectively.

For the fiscal, the company expects adjusted gross margin to remain flat with fiscal 2016 level of 61%, but increase on a constant-currency basis owing to lower average unit cost. However, it expects gross margin to remain pressured in the fiscal first quarter due to greater traffic headwinds and the persistent promotional environment.

Operating expenses for the fiscal are estimated to witness savings of nearly 3% from the operating expenses of nearly $2 billion incurred in fiscal 2016. Overall, the company expects cost savings of nearly $100 million in fiscal 2017, driven by the actions taken to reduce operating expenses in fourth-quarter fiscal 2016. The company expects net income attributable to non-controlling interests to come in at about $4 million, while shares outstanding are anticipated to be about 68 million.

For fiscal 2017, the company expects capital expenditure of $100 million, of which about $70 will be spent for store updates and nearly $20 million for direct-to-consumer, omni-channel and information technology investments to boost growth.

Zacks Rank & Key Picks

Abercrombie currently carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the same industry include Zumiez Inc. (ZUMZ Quick QuoteZUMZ - Free Report) , Genesco Inc. (GCO Quick QuoteGCO - Free Report) and Kate Spade & Company , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zumiez has jumped 27.9% in the last six months. The stock has a long-term earnings growth rate of 15%.

Genesco has gained nearly 23.7% in the last six months. Moreover, it has a long-term earnings growth rate of 9.5%.

Kate Spade, with a long-term earnings growth rate of 28.3%, has increased nearly 24.1% in the last six months.

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