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Abercrombie Slips to Strong Sell on Dismal Q1 Performance

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On May 28, 2016, Zacks Investment Research downgraded New Albany, OH-based Abercrombie & Fitch Company (ANF - Free Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

The stock of this specialty retailer of premium, high-quality casual apparel is in sharp decline after reporting dismal first-quarter fiscal 2016 results. Abercrombie & Fitch’s shares plunged 19.5% since its first-quarter earnings announcement on May 26. Also, year to date, the stock nosedived 25.2%.

After three straight quarters of positive earnings surprises, Abercrombie incurred a wider-than-estimated first-quarter loss. Concurrently, the company’s sales missed expectations and fell year over year owing to soft traffic trends in international markets and its U.S. flagship and tourist stores.

Further, the company expects the fiscal second quarter to remain challenging, which will result in lower comparable store sales (comps) and gross margin. While the company expects trends to improve in the second half of fiscal 2016, its cost and margin guidance for fiscal 2016 was not very encouraging.

These factors not only raise concerns about the company’s performance in the near future, but have also dragged its forward estimates. The Zacks Consensus Estimate declined 5.1% to $1.12 per share for fiscal 2016 and 4.2% to $1.37 per share for fiscal 2017, over the past 7 days.

Additionally, adverse foreign currency fluctuations have been weighing on Abercrombie’s results as more than a quarter of the company’s total revenue comes from overseas operations. These headwinds bore nearly a 5 cent per share adverse impact on the company’s bottom-line results in the fiscal first quarter. Looking ahead, management expects adverse currency trends to linger. Evidently, sales and operating income for fiscal 2016 are expected to be hurt by these headwinds to an extent of $10 million and $15 million, respectively.

However, the company is encouraged by the performance of its Hollister brand. Also, it remains confident on the back of its efficient cost management and constant focus on reviving its brands and enhancing performance.

Stocks to Consider

A couple of better-ranked stocks in the same industry include The Children’s Place Inc. PLCE and Destination XL Group, Inc. DXLG, each with a Zacks Rank #2 (Buy). Another favorably ranked stock in the related industry include Delta Apparel Inc. DLA, with a Zacks Rank #1 (Strong Buy).

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