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Abercrombie & Fitch Co. (ANF - Free Report) has reported robust third-quarter fiscal 2023 results, with the top and bottom lines surpassing the Zacks Consensus Estimate and improving year over year. Results have benefited from the exceptional performance at the Abercrombie brand and improvement in the Hollister brand.
The company noted that its efforts to improve the positioning of the Hollister brand have been paying off. Also, strategic investments across stores, digital and technology via its Always Forward Plan bode well. Consequently, management has raised its sales and operating margin view for fiscal 2023.
Despite the solid results and upbeat outlook, the stock declined 5.8% in the pre-market session on Nov 21. Shares of this Zacks Rank #2 (Buy) company have gained 75.6% in the past three months compared with the industry's growth of 7.4%.
Image Source: Zacks Investment Research
Sales & Earnings Picture
Abercrombie’s adjusted earnings of $1.83 per share in the fiscal third quarter improved significantly from the 1 cent reported in the prior-year quarter. Moreover, the bottom line surpassed the Zacks Consensus Estimate of $1.14 by a huge margin. The robust earnings performance can be attributed to strong top-line growth, coupled with improved gross and operating margins resulting from strong operating leverage. Higher average unit retail (AUR) and reduced freight costs mainly aided margins.
Net sales of $1,056.4 million advanced 20% year over year and surpassed the Zacks Consensus Estimate of $978 million. Net sales grew 19% on a constant-currency basis. ANF’s comparable sales improved 16%. The top-line beat was led by substantial growth in the Abercrombie brand, along with momentum in Hollister.
Abercrombie & Fitch Company Price, Consensus and EPS Surprise
Sales were strong in the Americas, up 22% year over year to $867.6 million. Additionally, sales grew 14% to $158 million in the EMEA and advanced 13% to $30.9 million in the APAC.
Brand-wise, net sales improved 11% year over year to $508.7 million at Hollister and advanced 30% to $547.7 million at Abercrombie. The Abercrombie brand contributed 52% to the total company sales, while Hollister represented 48% of sales.
Exceptional sales growth at Abercrombie was driven by consistent growth across genders, channels and geographies. This marked the highest fiscal third-quarter sales for the brand in the company’s history. Meanwhile, sales at Hollister benefited from a solid back-to-school season, and assortment and brand evolution amid teen customers. Growth in the Hollister brand was led by the women’s business.
Our model had predicted sales growth of 19.5% for the Abercrombie brand and 1.4% for Hollister for the fiscal third quarter. We estimated sales to increase 8.5% in the Americas, 16.4% in the EMEA and 19.8% in the APAC for the fiscal third quarter.
Margins
Abercrombie’s gross margin expanded 570 basis points (bps) year over year to 64.9% in the quarter, driven by improved product acceptance and tight inventory management across brands. The gross margin expansion included a 200-bps gain from reduced freight costs, a 250-bps benefit from AUR growth and a 200-bps gain from lower inventory write-downs. This was partly negated by an 80-bps impact from higher raw material costs.
Operating expenses, excluding other operating losses, increased 8% year over year. Higher incentive-based compensation, inflation, marketing and technology expenses led to the increase. As a percentage of sales, operating expenses of 51.7% declined 560 bps from the prior-year quarter.
The company reported an operating income of $138 million compared with a reported operating income of $18 million and an adjusted operating income of $21 million in the year-ago period. The operating margin of 13.1% expanded 1,110 bps year over year, powered by gross margin expansion and operating expense leverage.
Our model had estimated a 530-bps expansion in the gross margin to 64.5%, owing to lower freight costs and improved AUR rate. We estimated a 40-bps decline in operating expense rate to 56.5% for the fiscal third quarter. Driven by the improved gross margin and operating expense leverage, our model predicted an operating margin of 8.1% for the fiscal third quarter, suggesting 570-bps growth from last year.
Other Financials
Abercrombie ended the fiscal third quarter with cash and cash equivalents of $649.5 million, long-term net borrowings of $248 million, and stockholders’ equity of $866.1 million, excluding non-controlling interests.
The company had a liquidity of $1 billion at the end of the fiscal third quarter, which included cash and equivalents, and borrowings available under the ABL Facility. Net cash provided by operating activities was $350 million as of Oct 28, 2023.
Outlook
Driven by the robust year-to-date performance and expectations of solid demand trends in the upcoming holiday season, the company raised its sales and operating margin guidance for fiscal 2023.
Management envisions year-over-year net sales growth of 12-14% for fiscal 2023, up from prior stated 10% growth. Fiscal 2023 includes a 53rd week, which is estimated to benefit sales by $45 million.
Abercrombie expects an operating margin of 10%, an increase from the earlier stated 8-9%. The revised guidance suggests a year-over-year expansion of 250 bps, driven by reduced freight and raw material costs, and a modest operating expense leverage with sales growth. These gains are expected to more than offset higher expenses resulting from inflation and increased investment for the 2025 Always Forward Plan initiatives.
ANF expects a capital expenditure of $160 million and a tax rate in the low 30% range for fiscal 2023. The tax rate replaces the previously mentioned low-to-mid 30% range.
For fourth-quarter fiscal 2023, the company expects sales growth to increase year over year in the low-double digits. The sales guidance estimates a gain of 375 bps from the 53rd week.
The operating margin is envisioned to be 12-14% compared with an adjusted operating margin of 7.7% in the prior-year quarter. This growth is expected to be driven by a higher gross margin on lower freight costs and higher AURs. The effective tax rate is anticipated to be 30%.
Other Stocks to Consider
Here are some other top-ranked stocks that investors can consider, namely The Gap Inc. (GPS - Free Report) , American Eagle Outfitters (AEO - Free Report) and Deckers Outdoor (DECK - Free Report) .
Gap is a premier international specialty retailer offering a diverse range of clothing, accessories and personal care products. GPS currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Gap’s current financial-year earnings suggests growth of 280% from the year-ago reported figure. GPS has a trailing four-quarter earnings surprise of 137.9%, on average.
American Eagle, a specialty retailer of casual apparel, accessories and footwear for men and women, currently carries a Zacks Rank of 2. AEO has a trailing four-quarter earnings surprise of 43.2%, on average.
The Zacks Consensus Estimate for American Eagle’s current financial year’s sales and earnings per share suggests increases of 2.4% and 37.1%, respectively, from the year-ago reported figures.
Deckers Outdoor, a leading designer, producer and brand manager of innovative, niche footwear and accessories, currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for Deckers Outdoor’s current financial-year sales and earnings suggests growth of 11.3% and 20.9% from the year-ago period’s actuals, respectively. DECK has a trailing four-quarter earnings surprise of 26.3%, on average.
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Abercrombie (ANF) Tops on Q3 Earnings & Sales, Raises FY23 View
Abercrombie & Fitch Co. (ANF - Free Report) has reported robust third-quarter fiscal 2023 results, with the top and bottom lines surpassing the Zacks Consensus Estimate and improving year over year. Results have benefited from the exceptional performance at the Abercrombie brand and improvement in the Hollister brand.
The company noted that its efforts to improve the positioning of the Hollister brand have been paying off. Also, strategic investments across stores, digital and technology via its Always Forward Plan bode well. Consequently, management has raised its sales and operating margin view for fiscal 2023.
Despite the solid results and upbeat outlook, the stock declined 5.8% in the pre-market session on Nov 21. Shares of this Zacks Rank #2 (Buy) company have gained 75.6% in the past three months compared with the industry's growth of 7.4%.
Image Source: Zacks Investment Research
Sales & Earnings Picture
Abercrombie’s adjusted earnings of $1.83 per share in the fiscal third quarter improved significantly from the 1 cent reported in the prior-year quarter. Moreover, the bottom line surpassed the Zacks Consensus Estimate of $1.14 by a huge margin. The robust earnings performance can be attributed to strong top-line growth, coupled with improved gross and operating margins resulting from strong operating leverage. Higher average unit retail (AUR) and reduced freight costs mainly aided margins.
Net sales of $1,056.4 million advanced 20% year over year and surpassed the Zacks Consensus Estimate of $978 million. Net sales grew 19% on a constant-currency basis. ANF’s comparable sales improved 16%. The top-line beat was led by substantial growth in the Abercrombie brand, along with momentum in Hollister.
Abercrombie & Fitch Company Price, Consensus and EPS Surprise
Abercrombie & Fitch Company price-consensus-eps-surprise-chart | Abercrombie & Fitch Company Quote
Sales by Region and Brands
Sales were strong in the Americas, up 22% year over year to $867.6 million. Additionally, sales grew 14% to $158 million in the EMEA and advanced 13% to $30.9 million in the APAC.
Brand-wise, net sales improved 11% year over year to $508.7 million at Hollister and advanced 30% to $547.7 million at Abercrombie. The Abercrombie brand contributed 52% to the total company sales, while Hollister represented 48% of sales.
Exceptional sales growth at Abercrombie was driven by consistent growth across genders, channels and geographies. This marked the highest fiscal third-quarter sales for the brand in the company’s history. Meanwhile, sales at Hollister benefited from a solid back-to-school season, and assortment and brand evolution amid teen customers. Growth in the Hollister brand was led by the women’s business.
Our model had predicted sales growth of 19.5% for the Abercrombie brand and 1.4% for Hollister for the fiscal third quarter. We estimated sales to increase 8.5% in the Americas, 16.4% in the EMEA and 19.8% in the APAC for the fiscal third quarter.
Margins
Abercrombie’s gross margin expanded 570 basis points (bps) year over year to 64.9% in the quarter, driven by improved product acceptance and tight inventory management across brands. The gross margin expansion included a 200-bps gain from reduced freight costs, a 250-bps benefit from AUR growth and a 200-bps gain from lower inventory write-downs. This was partly negated by an 80-bps impact from higher raw material costs.
Operating expenses, excluding other operating losses, increased 8% year over year. Higher incentive-based compensation, inflation, marketing and technology expenses led to the increase. As a percentage of sales, operating expenses of 51.7% declined 560 bps from the prior-year quarter.
The company reported an operating income of $138 million compared with a reported operating income of $18 million and an adjusted operating income of $21 million in the year-ago period. The operating margin of 13.1% expanded 1,110 bps year over year, powered by gross margin expansion and operating expense leverage.
Our model had estimated a 530-bps expansion in the gross margin to 64.5%, owing to lower freight costs and improved AUR rate. We estimated a 40-bps decline in operating expense rate to 56.5% for the fiscal third quarter. Driven by the improved gross margin and operating expense leverage, our model predicted an operating margin of 8.1% for the fiscal third quarter, suggesting 570-bps growth from last year.
Other Financials
Abercrombie ended the fiscal third quarter with cash and cash equivalents of $649.5 million, long-term net borrowings of $248 million, and stockholders’ equity of $866.1 million, excluding non-controlling interests.
The company had a liquidity of $1 billion at the end of the fiscal third quarter, which included cash and equivalents, and borrowings available under the ABL Facility. Net cash provided by operating activities was $350 million as of Oct 28, 2023.
Outlook
Driven by the robust year-to-date performance and expectations of solid demand trends in the upcoming holiday season, the company raised its sales and operating margin guidance for fiscal 2023.
Management envisions year-over-year net sales growth of 12-14% for fiscal 2023, up from prior stated 10% growth. Fiscal 2023 includes a 53rd week, which is estimated to benefit sales by $45 million.
Abercrombie expects an operating margin of 10%, an increase from the earlier stated 8-9%. The revised guidance suggests a year-over-year expansion of 250 bps, driven by reduced freight and raw material costs, and a modest operating expense leverage with sales growth. These gains are expected to more than offset higher expenses resulting from inflation and increased investment for the 2025 Always Forward Plan initiatives.
ANF expects a capital expenditure of $160 million and a tax rate in the low 30% range for fiscal 2023. The tax rate replaces the previously mentioned low-to-mid 30% range.
For fourth-quarter fiscal 2023, the company expects sales growth to increase year over year in the low-double digits. The sales guidance estimates a gain of 375 bps from the 53rd week.
The operating margin is envisioned to be 12-14% compared with an adjusted operating margin of 7.7% in the prior-year quarter. This growth is expected to be driven by a higher gross margin on lower freight costs and higher AURs. The effective tax rate is anticipated to be 30%.
Other Stocks to Consider
Here are some other top-ranked stocks that investors can consider, namely The Gap Inc. (GPS - Free Report) , American Eagle Outfitters (AEO - Free Report) and Deckers Outdoor (DECK - Free Report) .
Gap is a premier international specialty retailer offering a diverse range of clothing, accessories and personal care products. GPS currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Gap’s current financial-year earnings suggests growth of 280% from the year-ago reported figure. GPS has a trailing four-quarter earnings surprise of 137.9%, on average.
American Eagle, a specialty retailer of casual apparel, accessories and footwear for men and women, currently carries a Zacks Rank of 2. AEO has a trailing four-quarter earnings surprise of 43.2%, on average.
The Zacks Consensus Estimate for American Eagle’s current financial year’s sales and earnings per share suggests increases of 2.4% and 37.1%, respectively, from the year-ago reported figures.
Deckers Outdoor, a leading designer, producer and brand manager of innovative, niche footwear and accessories, currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for Deckers Outdoor’s current financial-year sales and earnings suggests growth of 11.3% and 20.9% from the year-ago period’s actuals, respectively. DECK has a trailing four-quarter earnings surprise of 26.3%, on average.