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Abercrombie & Fitch (ANF) Plunges on Dismal Q3 Earnings

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Abercrombie & Fitch Co.’s (ANF - Free Report) shares plunged over 13% on Nov 18, after the company reported dismal third-quarter fiscal 2016 results. A soft sales performance due to traffic headwinds at its namesake U.S. flagship and tourist location stores was primarily responsible for the quarter’s weakness. However, results gained from sequential growth in Hollister along with solid direct-to-customer and omni-channel performance. Further, the company benefited from a disciplined inventory and expense control.

The company’s quarterly adjusted earnings per share of 2 cents significantly lagged the Zacks Consensus Estimate of 19 cents and declined 95.8% from the prior-year quarter earnings of 48 cents. Results for the quarter included an impact of nearly 9 cents per share from adverse currency exchange rates.
 
Including certain one-time items, Abercrombie reported earnings per share of 12 cents compared with 60 cents per share in the year-ago quarter.

ABERCROMBIE Price, Consensus and EPS Surprise

ABERCROMBIE Price, Consensus and EPS Surprise | ABERCROMBIE Quote

Quarter in Detail

Net sales were down nearly 6% year over year to $821.7 million and missed the Zacks Consensus Estimate of $831 million. The decline reflects a 7% drop in domestic sales to $531.4 million and 5% lower international sales of $290.3 million. Additionally brand-wise, sales for Abercrombie fell 13% to $358.3 million while sales at Hollister declined 1% to $463.5 million.

However, net sales of the company benefited from a 23% contribution from its direct-to-consumer and omni-channel businesses in the reported quarter.

Comparable store sales (comps) slipped 6% owing to lower traffic, particularly at its namesake brand’s flagship and tourist locations in the U.S., along with weakness in A&F’s seasonal categories. However, comps gained from the strength in its direct-to-customer business, on both domestic and international fronts, along with sequentially improved comps at its Hollister business. Further, conversion trend remained solid in both channels.

The Abercrombie brand recorded comps decline of 14%, while Hollister reported flat-comps results.

Adjusted gross margin contracted 60 basis points in constant currency to 62.2%, mainly due to lower average unit retail, partly offset by lower average unit costs. Additionally, the underperformance of A&F’s seasonal products weighed on gross margins.

Financials

Abercrombie ended the quarter with cash and cash equivalents of $469.7 million, long-term borrowings of $285 million, and shareholders’ equity of $1,219.6 million. As of Oct 29, 2016, inventories were $516.1 million, down nearly 14.2% from the prior-year quarter.

On Nov 16, management declared a quarterly cash dividend of 20 cents per share, payable on Dec 12, to shareholders on record as of Dec 2.

Store Update

During the fiscal third quarter, the company introduced three stores in the U.S., including one namesake and two Hollister store, while it inaugurated two new domestic namesake stores and one new international Hollister store. The company also closed one namesake and one Hollister store, both in the U.S. With this, the company operated 745 stores in the U.S. and 185 stores across Canada, Europe, Asia and the Middle East, as of Oct 29, 2016.

Year to date, the company has opened a total of 13 stores, including five outlet stores. Further, the company has shut 15 stores so far this year.

In the fourth quarter, the company plans to open another seven stores, comprising five in China and two in the U.S. Apart from this, the company intends to pull down shutters on approximately 35 stores in the U.S. during the fourth quarter via natural lease expirations, remaining on track to complete its already planned 60 store closures for the fiscal year.

Outlook

Following the dismal fiscal third quarter, the company expects comps to remain challenging in fourth-quarter fiscal 2016 compared to last year, while the same is anticipated to improve modestly on a sequential basis. Further, it expects foreign currency headwinds to hurt sales and operating income in the fiscal fourth quarter.

For fiscal fourth quarter, the company expects adjusted gross margin to decline marginally from last year’s rate of 60.7%, owing to a decline in average unit retail, offset by lower average unit cost.

Operating expenses for the fiscal fourth quarter are estimated to inch up 1% to $554, driven by a lease termination charge of $16 million to be recorded in the fourth quarter negated by savings from its expense reduction initiatives. The company expects net income attributable to non-controlling interests to come in at about $1 million, while shares outstanding are anticipated to be about 68 million.

For fiscal 2016, the company expects the effective tax rate in mid-to-upper 20s. The company now expects capital expenditure of $140 million for the fiscal, directed toward store openings and updates, along with direct-to-consumer and technological initiatives.

Zacks Rank & Key Picks

Abercrombie currently carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the same industry include Zumiez Inc. (ZUMZ - Free Report) , Nordstrom Inc. (JWN - Free Report) and Foot Locker Inc. (FL - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Nordstrom has gained nearly 18.3% year to date. Moreover, it has a long-term earnings growth rate of 9.7%.

Foot Locker, with a long-term earnings growth rate of 9.9%, has increased nearly 10.3% year to date.

Zumiez has jumped 62.4% year to date. The stock has a long-term earnings growth rate of 15%.

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