It has been about a month since the last earnings report for Abercrombie & Fitch (ANF Quick QuoteANF - Free Report) . Shares have lost about 10.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Abercrombie due for a breakout? 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 catalysts.

Abercrombie's Q3 Earnings Top Estimates, Sales Down Y/Y

Abercrombie reported third-quarter fiscal 2020 results, with the top and the bottom line surpassing the Zacks Consensus Estimates. Moreover, the bottom line improved year on year. However, management continued to witness adverse impacts of the COVID-19 pandemic on stores that put pressure on the top line.

Nevertheless, the company’s digital platform remained strong, backed by improved traffic, conversions and new customer acquisition. Additionally, management is impressed with growth in gross margin, stemming from prudent inventory management strategies. Also, control over expenses aided the quarterly performance.

Going ahead, the company plans to continue boosting omni-channel capabilities. The company is working toward rationalizing its store base by reducing dependence on underperforming tourist driven locations.

Q3 Highlights

Abercrombie delivered adjusted earnings of 76 cents per share in fiscal third quarter compared with earnings of 23 cents in the year-ago quarter. The Zacks Consensus Estimate was pegged at a loss of 5 cents.

Net sales totaled $819.7 million, which surpassed the Zacks Consensus Estimate of $735.3 million. However, the top line declined 5% from the year-ago quarter’s figure due to adverse impacts of the COVID-19 pandemic on store sales.

Digital net sales were strong during the quarter, surging 43% year over year to $382 million. Markedly, digital sales reflected robust growth in every month of the quarter.

Brand-wise, net sales declined 7% and 2% to $476.7 million and $343 million for the Hollister and Abercrombie brands, respectively. From a geographical viewpoint, net sales fell 4% in the United States and dropped 6% in International markets.

Margins

Gross margin expanded 390 basis points (bps) to 64% gaining from increased average unit retail and reduced average unit cost as well as favorable impacts from inventory shrink and foreign currency exchange rates.

Adjusted operating income totaled $65 million as compared to $25 million in the year-ago quarter. Tight expense management boosted operating income in the reported quarter.

Other Financials

Abercrombie ended the quarter with cash and cash equivalents of $813 million and long-term gross borrowings (under senior secured notes) of $350 million. Also, inventories were $546 million, down 8% from the prior-year quarter’s levels. For the year-to-date period ended Oct 31, 2020, net cash provided by operating activities amounted to $159 million. Net cash used for investing activities amounted to $92 million. Management expects capital expenditures for fiscal 2020 to be nearly $110 million.

We note that management suspended its share repurchase program and dividend payouts in wake of the COVID-19 outbreak. Prior to this, it returned nearly $28 million to shareholders in the forms of share repurchases and dividends. That said, the company boasts a liquidity of $1.2 billion as of Oct 31, 2020, compared with liquidity of $770 million as of Nov 2, 2019. The company’s liquidity comprises cash and equivalents as well as borrowings available under the senior-secured asset-based revolving credit facility of nearly $345 million.

Store Update

As part of its store optimization plans, Abercrombie plans to reposition larger format flagship locations to smaller omni-channel enabled stores. Progressing on these efforts, the company will close four European flagship locations, before their natural lease expirations. Markedly, the Dusseldorf flagship store was shuttered during the third quarter, while the London, Munich and Paris flagships will close by the end of January, 2021. Additionally, flagship stores at Brussels, Madrid and Fukuoka will close in early January, owing to natural lease expirations. As of Oct 31, 2020, the company’s total store base included 641 stores in the United States and 208 stores internationally.

Outlook

For fourth-quarter fiscal 2020, management expects net sales to be down in the range of 5-10% owing to deceleration of current trends. Management is cautious regarding the economic uncertainty surrounding the COVID-19 pandemic. With rising number of cases, the company anticipates a potential change in apparel demand. Additionally, store traffic is likely to remain soft. Also, the company is apprehensive regarding any possible pandemic-led store restrictions and closures as well as increases in shipping, handling and freight costs. Moreover, the company expects gross margin to be up only slightly on a year-over-year basis.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -19.11% due to these changes.

VGM Scores

Currently, Abercrombie has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was 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.

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.