It has been about a month since the last earnings report for Abercrombie & Fitch Company (ANF Quick QuoteANF - Free Report) . Shares have added about 19.3% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is ANF due for a pullback? 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 drivers.

Abercrombie Q4 Earnings Beat, Guides for FY18

Abercrombie & Fitch reported robust fourth-quarter fiscal 2017, wherein both earnings and sales beat the Zacks Consensus Estimate and improved year over year. Notably, this was the third straight positive earnings surprise and the fourth consecutive sales beat.

Results gained from significant progress on its strategic initiatives and strength in Hollister as well as direct-to-customer business, amid a highly promotional retail backdrop.

Q4 Synopsis

The company posted fourth-quarter adjusted earnings of $1.38 per share, significantly outpacing the Zacks Consensus Estimate of $1.13. Moreover, the bottom line increased a whopping 84% from 75 cents earned in the year-ago quarter. Earnings benefited from more than double operating income in the quarter, as well as from the positive currency impact. Notably, currency tailwinds, net of hedging, were roughly 14 cents per share in the quarter.

Net sales of $1,193.2 million surpassed the Zacks Consensus Estimate of $1,169 million and grew 15% year over year. The upside was driven by comparable sales (comps) growth of 9%, benefits of 4% from the additional week and positive currency impact of 3%.

Brand-wise, net sales improved 19% to $709.2 million at Hollister, while sales for the Abercrombie brand rose 9% to $484 million. From a geographical viewpoint, net sales grew 13% and 20%, in the United States and international markets, respectively. Moreover, the company’s direct-to-consumer business continued to perform well, accounting for nearly 34% of the net sales and recording 18% increase in comparable sales.

The company remains encouraged by comps performance that benefited from the rise in traffic and conversion. Notably, positive traffic trends improved sequentially from the third quarter. Further, we note that the company’s comps improved sequentially throughout fiscal 2017, with positive comps across brands and geographies in the fourth quarter.

On a segmental basis, comps for Hollister increased 11%, while Abercrombie reported 5% growth. Moreover, comps improved 11% in the United States and 5% internationally.

While the Hollister brand reflected persistent positive momentum from previous quarters, Abercrombie showed further signs of improvement, returning to positive comps trend in the fourth quarter.

Gross profit margin contracted 90 basis points (bps) to 58.4%, owing to increased average unit cost and lower average unit retail.

Abercrombie reported adjusted operating income of $148 million for the quarter, substantially up from adjusted operating income of $61 million recorded in the prior-year period. This marks more than double operating income growth for the quarter. Despite the lower gross margins, the increase in operating income is attributed to significant expense leverage during the quarter.

Financials

Abercrombie ended fiscal 2017 with cash and cash equivalents of $675.6 million and gross borrowings under its term loan agreement of $253.3 million. As of Feb 3, 2018, inventories were $424.4 million, up 6% from the prior-year period.

On Feb 23, the company declared a quarterly dividend of 20 cents per share on the Class A Common Stock. This is payable on Mar 19, to shareholders of record as of Mar 9.

Store Update

In fiscal 2017, the company inaugurated nine new stores, comprising six in the United States and one international full-price store, as well as two outlet stores. Additionally, the company shut down 39 stores in the fiscal, mainly in the United States.

Management expects to introduce 21 full-price stores in fiscal 2018, including 11 in the United States and 10 in international locations. Moreover, it plans to shut down up to 60 stores in the United States in fiscal 2018, through natural lease expirations.

Outlook

We note that the company made significant progress on its initiatives in fiscal 2017. This helped it reach significant milestones, including $2 billion sales generated at Hollister, Abercrombie’s return to positive comps trend in the fourth quarter and record digital sales growth across all brands. Going forward, the company remains keen on further improving customer experience by investing in loyalty programs, stores, direct-to-consumer and omni-channel capabilities. Further, the company expects to maintain its disciplined approach to expense management to drive top- and bottom-line growth.

For fiscal 2018, both comps and sales are projected to be up low-single digits. Top line gains from the favorable currency rates will be offset the absence of the additional week sales in 2017. Favorable foreign currency rate is expected to contribute nearly $50 million to sales and $15 million to operating income in fiscal 2018.

Gross margin is projected to be slightly above the fiscal 2017 level of 59.7%, while it will remain pressured in the first quarter. Operating expense, including other operating income, is expected to increase nearly 1% from $2 billion recorded in fiscal 2017. This will continue to reflect expense leverage while supporting ongoing investments in strategic initiatives. Abercrombie also expects average shares outstanding of about 71 million.

Furthermore, the company expects core tax rate to be in the mid-to-high 20s range driven by the recently enacted tax reform. However, including nearly $10 million of discrete non-cash income tax charges related to share-based compensation accounting standards, it expects effective tax rate in the mid-to-high 30s range.

For the first quarter, the company estimates effective tax rate of low-double digits to low teens, including $9 million from the aforementioned non-cash income tax charges.

Additionally, the company envisions capital expenditures to be roughly $130 million for fiscal 2018. This will include $85 million for store updates and new stores and nearly $45 million for direct-to-consumer and omni-channel investments, information technology and other projects.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. There has been one revision higher for the current quarter compared to one lower.

Abercrombie & Fitch Company Price and Consensus

 

Abercrombie & Fitch Company Price and Consensus | Abercrombie & Fitch Company Quote

VGM Scores

At this time, ANF has a great Growth Score of A, though it is lagging a bit on the momentum front with a B. The stock was also 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for growth investors than those looking for value and momentum.

Outlook

ANF has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.