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Bear of the Day: Abercrombie & Fitch (ANF)

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The retail sector has and continues to be extremely competitive and volatile.  Specifically, in the apparel segment competition, cost cutting, and lowering headcounts have kept pressure on the sector for quite some time.  For example, it was announced yesterday that Ralph Lauren will be shutting down 50 stores and eliminating almost 1,000 jobs.  This tough environment is the reason Abercrombie & Fitch (ANF - Free Report) is the Zacks Bear of the Day.

This Zacks Rank #5 (Strong Sell) company is principally engaged in the purchase, distribution and sale of men's, women's and kids' casual apparel. The company's retail activities are conducted under the Abercrombie & Fitch and abercrombie trade names through retail stores, a catalogue, a magazine/catalogue and a website, all bearing some form of the company name. Merchandise is targeted to appeal to customers in specialty markets who have distinctive consumer characteristics.

Recent Earnings Results

In their most recent earnings announcement, the company beat the Zacks consensus revenue estimate, but came in way below the Zacks consensus earnings estimate; came in at -$0.16 against the expectation of $0.12.  Specifically, comparable same store sales (SSS) saw a -4% decline in both brands and geography.  On the international side, comps declined in Asia, and all across Europe.  Also, brand net sales fell -5%, and geography net sales fell -5%.  Management also saw SG&A expenses increased by 6.4%

According to Arthur Martinez, Executive Chairman, “Our results for the quarter reflect significant traffic headwinds, particularly in international markets and in our U.S. flagship and tourist stores, resulting in negative comparable sales. However, in the face of these headwinds, we were encouraged by our U.S. business, where comparable sales improved in the Hollister brand, and gross margin rate increased meaningfully for both brands. Overall, our business remains well managed in these challenging times, with our assortment and customer-centricity efforts driving improved conversion, and expense and inventory well controlled.

Potential in Second Half of 2016

Currently, management expects to see strength in the second half of 2016.  Mr. Martinez commented on the second half stating, “We expect the second quarter to remain challenging, but to see better results in the back half of the year as our assortments continue to improve and we see returns from significant investments in marketing, store management and omnichannel.  In addition, with the new brand presidents and other key roles now filled, we have a strong team in place to drive our brands forward and capitalize on the many opportunities we see ahead of us.”

Price and Consensus Graph

As you can see from the graph below, Abercrombie’s price and earnings consensus numbers have been falling for the past two years.

Decreasing Estimates

Due to the poor Q1 16 results, earnings estimates for Q2 16, FY 16 and FY 17 have all seen significant downgrades over the past 30 days; Q2 16 fell from $0.07 to -$0.20, FY 16 dropped from $1.18 to $0.92, and FY 17 plummeted from $1.43 to $1.17.

Bottom Line

There is strong potential in the second half for ANF, but in the short term, the company is facing many headwinds.  While ANF is the Bear of the Day, it does not mean that they are a bad company, they do have positive potential in the later part of 2016, but given management’s statements you would be wise to keep away from them until then. 

If you are inclined to invest in the Retail/Apparel Segment, you would be best served by looking into Childrens Place (PLCE - Free Report) , and or Destination XL both of which currently carry a Zacks Rank #2 (Buy).

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