Abercrombie & Fitch (ANF Quick QuoteANF - Free Report) has been gaining from continued momentum in the Abercrombie brand and the sequential improvement in the Hollister brand. Its store initiatives and Always Forward Plan bode well.

This led to the robust fourth-quarter fiscal 2022 top line, which beat the Zacks Consensus Estimate and improved year over year. Net sales of $1,200 million rose 3% year over year and 5% on a constant-currency basis. This was mainly driven by better inventory to meet demand during the peak holiday period.

The company has been working toward rationalizing its store base by reducing its dependence on underperforming tourist-driven locations. As part of its store-optimization plans, ANF intends to reposition larger-format flagship locations to smaller omni-channel-enabled stores. Progressing on these efforts, it opened 28 stores, including 17 Hollister and 11

Abercrombie stores, in the fiscal fourth quarter. It closed 11 Hollister and 6 Abercrombie stores. As of Jan 28, its total store base was 762, including 560 stores in the United States and 202 stores internationally.

Also, Abercrombie has been on track with its 2025 Always Forward plan focuses on brand growth, leveraging its omni-channel capabilities, and expanding digital penetration and financial discipline. As part of the plan, the company earlier provided a financial outlook for fiscal 2025 and a long-term view. It anticipates annual revenues of $4.1-$4.3 billion and an annual operating margin rate of 8% or more by the end of fiscal 2025. For the long term, management expects annual revenues of $5 billion and an annual operating margin rate of 10% or more.

The company also predicts the Abercrombie & Fitch and abercrombie kids brands to see a 6-8% sales (CAGR) over the next three years, with Hollister and Gilly Hicks brands likely to generate a flat-to-2% and 15% sales (CAGR). Notably,

Abercrombie & Fitch adults are forecast to be the major drivers. ANF intends to accelerate its digital revolution via Knowing Their Customer Better and Wowing Them Everywhere initiatives. Also, increased investment in customer analytics to meet and outpace customer demand bodes well. Lastly, it plans to generate at least $600 million of free cash flow in the next three years to deliver healthy shareholder returns, and drive omni-channel growth across digital and physical stores.

Driven by these factors, management envisions first-quarter fiscal 2023 net sales to be flat year over year at $813 million. The company anticipates the operating margin between flat to 2% compared with the year-ago quarter’s loss of 1% due to lower freight and raw material costs, partly offset by inflation and increased operating expenses to support investment for the 2025 Always Forward Plan initiatives.

For fiscal 2023, ANF expects net sales growth of 1-3% from the year-ago period’s reported figure of $3.7 billion. Abercrombie is likely to continue outperforming the Hollister brand, while the U.S. region is expected to continue outperforming International. Management also anticipates sales growth to be weighted to the second half of the year, driven by the inclusion of a 53rd week for reporting purposes, along with store expansion. The 53rd week is estimated to contribute $45 million to sales in 2023. Abercrombie expects an operating margin of 4-5%, including gains of 200 bps from reduced freight and raw material costs, somewhat offset by inflation and increased operating expense investment for the 2025 Always Forward Plan initiatives.

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Consequently, shares of this Zacks Rank #3 (Hold) company have gained 18.4% in the past three months against the industry’s decline of 0.9%.

However, higher product costs, elevated cotton costs and inventory reserves dented margins in the fiscal fourth quarter. Abercrombie’s gross margin contracted 260 bps to 55.7%, which, in turn, led to a year-over-year bottom-line decline of 29%.

All said, we hope that Abercrombie’s brand strength, store optimization efforts and other growth strategies will help offset rising costs. Notably, earnings estimates for the current financial year have increased 1.4% to $1.43 over the past seven days. Topping it, a VGM Score of A reflects its inherent strength.

Stocks to Consider

Some better-ranked stocks that you may want to consider are Urban Outfitters (URBN Quick QuoteURBN - Free Report) , DICK’S Sporting Goods (DKS Quick QuoteDKS - Free Report) and American Eagle Outfitters (AEO Quick QuoteAEO - Free Report) .

Urban Outfitters, a leading lifestyle product and services company, currently carries a Zacks Rank #2 (Buy). Its expected EPS growth rate for three to five years is 18%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Urban Outfitters’ current fiscal-year revenues suggests growth of 5% from the year-ago reported figure.

DICK’S Sporting, a major omni-channel sporting goods retailer offering athletic shoes, apparel, accessories and a broad selection of outdoor and athletic equipment, carries a Zacks Rank #2 at present. Its expected EPS growth rate for three to five years is 5.4%.

The Zacks Consensus Estimate for DICK’S Sporting’s current fiscal-year revenues and EPS suggests growth of 2.2% and 10%, respectively, from the year-ago reported figures. DKS has a trailing four-quarter earnings surprise of 10%, on average.

American Eagle Outfitters, a retailer of casual apparel, accessories and footwear, currently carries a Zacks Rank of 2. AEO delivered an earnings surprise of 82.6% in the last reported quarter.

The Zacks Consensus Estimate for American Eagle Outfitters’ current fiscal-year sales and EPS suggests growth of 1.3% and 58.9%, respectively, from the year-ago reported figures.