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Why Should You Add Abercrombie (ANF) Stock to Your Portfolio?

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Abercrombie & Fitch Company (ANF - Free Report) has been favored by investors for quite some time, owing to its store optimization, cost containment and digital expansion strategies. This has been a boon for the company’s overall performance.

It retained investors' bullish sentiments by maintaining its earnings beat streak in all the last four quarters, the average being 510.6%. Also, the top line surpassed estimates in the last four quarters. This, in turn, underlines its operational excellence.

In the past seven days, the company’s estimates for fiscal 2021 and fiscal 2022 earnings per share have moved up 65.1% and 44.2%, respectively. For fiscal 2021, its earnings estimates are pegged at $2.51 per share, suggesting a rise of 443.8% from the year-ago reported figure.

Moreover, the Zacks Rank #1 (Strong Buy) stock has gained 50.9% in the past three months compared with the industry’s growth of 5.5%. Also, the company’s shares have rallied 9.7% since reporting robust first-quarter fiscal 2021 results on May 26, 2021.

 

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Now let us discuss at length what makes the leading apparel retailer an investor favorite.

Upbeat Q1 Performance

Abercrombie posted better-than-expected first-quarter fiscal 2021 results, with earnings and sales improving year over year. Moreover, the fiscal first quarter marked the company’s return to profits after reporting a loss in the prior quarter. Abercrombie’s first-quarter fiscal 2021 reported strong growth in key metrics on a two-year basis (compared with first-quarter fiscal 2019), reflecting robust growth from the pre-pandemic levels.

Earnings growth demonstrated the company’s robust digital sales momentum coupled with gross margin expansion and tight expense management. The top line benefited from strong digital momentum as well as the reopening of stores across all regions, except for Western Europe.

Digital Expansion – A Key Growth Driver

Abercrombie has been making significant progress in expanding digital and omni-channel capabilities to better engage with consumers.  The company’s strong digital momentum continued in first-quarter fiscal 2021, with digital sales advancing 45% year over year and contributing about 52% to total sales. The digital business mainly benefited from the addition of customers in the channel, backed by robust digital marketing efforts. Also, high customer retention and spend per customer aided sales growth.

The company remains encouraged with its strong online presence and expects to keep gaining from the platform. For fiscal 2021, it expects 50% of its planned $100-million capital spending to be used for investments in digital and technology. It also plans to continue investing to bolster omni-channel capabilities, including curbside and ship-from-store services. It is also striving to optimize capacity at its distribution centers to meet increasing digital demand.

Store Optimization Plans

As part of its store optimization strategies, Abercrombie plans to reposition larger format flagship locations to smaller omni-channel-enabled stores. Progressing on the efforts, the company earlier closed eight European flagship locations in fiscal 2020, bringing the total count of flagship stores to seven at the beginning of fiscal 2021. In the first quarter of fiscal 2021, it closed the Abercrombie & Fitch brand’s store in Orchard Road Singapore flagship, bringing the flagship store count to six. Apart from the flagship store, the company closed seven stores in the fiscal first quarter. It also opened four stores in the reported quarter. As of May 1, 2021, the company’s total store base was 731, including 533 stores in the United States and 198 stores internationally.

Cost-Optimization Efforts Boost Margins

Abercrombie has been on track with its cost-minimization measures through prudent expense management strategies, including reducing in-store payroll and store occupancy expenses, lower marketing costs and COVID-related rent abatements. These have contributed to significant margin growth in the first quarter of fiscal 2021.

Notably, gross margin expanded 900 basis points (bps), driven by improved average unit retail on reduced promotions. Additionally, gross margin benefited from tightly managed inventories and favorable responses from new and existing customers, which led to improved price realization. This along with tight expense management resulted in an adjusted operating income of $60 million against an operating loss of $166 million reported in the year-ago quarter. Additionally, gross margin expanded by 290 bps and operating margin increased by 1,100 bps from the pre-pandemic levels.

Looking ahead, management remains on track to control spending by undertaking measures like occupancy cost reduction through store closures and right-sizing. In fiscal 2021, the company expects to tightly control operating costs, with a focus on using a portion of the occupancy savings for funding fulfillment, marketing and digital investments.

Conclusion

Backed by the progress on its strategies, we expect the company to retain its business momentum in the near term. Further, it expects to continue with the progress made since 2020. The company anticipates retaining the gross margin rate through continued tight inventory management, partly offset by potential cost headwinds in fiscal 2021. For second-quarter fiscal 2021, it anticipates net sales above the comparable 2019 level of $841 million.

Moreover, the company expects the gross margin rate to increase at least 200 bps in the fiscal second quarter from 60.7% reported in the prior-year quarter. It remains cautiously optimistic about its ability to deliver AUR improvements through reduced promotions and clearance activity as well as potential FX tailwinds. The company’s favorable view further supports our suggestion to add this valuable stock for promising returns.

Other Apparel Stocks to Watch

Urban Outfitters, Inc. (URBN - Free Report) has a long-term earnings growth rate of 11.5%. It currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Children’s Place, Inc. (PLCE - Free Report) , also a Zacks Rank #1 stock, has an expected long-term earnings growth rate of 8%.

Foot Locker, Inc. (FL - Free Report) has a long-term earnings growth rate of 4%. It currently sports a Zacks Rank #1.

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