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Abercrombie (ANF) Soars Despite Q2 Loss, Back to Beat Trend

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The distressed Abercrombie & Fitch Co. (ANF - Free Report) came up with a solid quarterly performance in a long time as it reported top and bottom-line beat in second-quarter fiscal 2017. Further, the company’s results compared favorably from the prior-year period. Notably, this was the company’s first positive bottom-line surprise in the last six quarters, following in-line results in first-quarter fiscal 2017. Moreover, revenues beat estimates for the second straight quarter.

Though the company delivered a loss in the reported quarter, results clearly reflected a significant progress on its strategic initiatives and strength in Hollister as well as direct-to-customer business, amid a highly promotional retail backdrop.

Consequently, shares of this Zacks Rank #3 (Hold) company surged a solid 17.1%% yesterday. Additionally, significant progress on strategic capital investments, cost saving efforts, loyalty and marketing programs have aided Abercrombie to outperform the broader industry on a year-to-date basis. The stock declined 6.2%, against the industry’s slump of 32.7%.



Q2 Synopsis

The company posted second-quarter adjusted loss of 16 cents per share, substantially narrower than the Zacks Consensus Estimate of a loss of 34 cents. Bottom-line result also compared favorably with the loss of 25 cents per share reported in the year-ago quarter. The company notes that currency headwinds had minimal impact on bottom-line results in the quarter.

Abercrombie & Fitch Company Price, Consensus and EPS Surprise

 

Abercrombie & Fitch Company Price, Consensus and EPS Surprise | Abercrombie & Fitch Company Quote

Net sales of $779.3 million came ahead of the Zacks Consensus Estimate of $761.6 million but dipped nearly 0.5% year over year. Much of the improvement in the top-line performance can be attributed to continued strength at Hollister.

Brand-wise, net sales rose 6% to $446.6 million at Hollister, while sales were down 8% to $332.7 million for Abercrombie.  From a geographical view point, net sales had declined 2% in the United States and increased 2% internationally. Direct-to-consumer sales performed well and accounted for 23% of the net sales, recording a growth of 24%.

Comparable sales (comps) for the quarter dipped 1%. However, the company remains encouraged by its comps performance as it marked the third consecutive quarter of sequential improvement driven by the aggressive execution of its strategic plan. On a segmental basis, comps for Abercrombie declined 7%, partially mitigated by increase of 5% for Hollister.

Gross profit margin, on a constant currency basis, contracted 160 basis points to 59.1% due to reduced average unit retail. Further assortment issues and more than planned promotional expenses hurt gross profit.

Abercrombie reported adjusted operating loss of $15 million for the quarter, compared with adjusted operating loss of $16.7 million recorded in the year-ago period.

Financials

Abercrombie ended the quarter with cash and cash equivalents of $421.9 million, long-term borrowings of $263.7 million, and shareholders’ equity of $1,166.3 million. As of Jul 29, 2017, inventories were $471 million, up nearly 4% from the prior-year period. The company continues to focus on tight inventory management policies in order to deliver better sales performance.

Store Update

During the second quarter, the company closed two Abercrombie stores in the United States, while it did not open any new store. Consequently, the company operated 703 stores in the United States and 188 stores internationally as of Jul 29, 2017.

During fiscal 2017, the company plans to open two new outlets in the United States alongside of seven full-price stores. Additionally, the company plans to shut down 60 stores in the United States on the basis of lease expirations. Store closure is expected to give Abercrombie more flexibility in terms of cost savings, amid a tough environment, where retailers are facing intense competition from continued shift to online shopping.

Outlook

Following the second-quarter results, the company provided guidance for fiscal 2017 and the second half of fiscal 2017.

The company expects comps to be nearly flat in fiscal 2017, while the same is anticipated to be flat to up slightly in the fiscal second-half. Going forward, the company expects foreign currency to be a tailwind, reflecting slight gains in sales and operating income.

Gross margin is projected to decline in fiscal 2017 from the prior-year rate of 61%. However, gross margin for the fiscal second half is likely to be nearly flat. Operating expenses for the fiscal are anticipated to decline not less than 3% compared with adjusted operating expense of $2,025 million in fiscal 2016.

Moreover, the company expects effective tax rate to be in the mid 30s range in both fiscal 2017 and the second half. It also expects average shares outstanding of about 69 million shares in fiscal 2017.

Additionally, the company continues to envision capital expenditure of $100 million for fiscal 2017.

Key Picks

Better-ranked stocks in the same industry include The Children’s Place, Inc. (PLCE - Free Report) , with a Zacks Rank #1 (Strong Buy), Canada Goose Holdings Inc. (GOOS - Free Report) and The Gap, Inc. (GPS - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Children’s Place has a long-term EPS growth rate of 9%. Further, the stock has returned 20.8% in the past year.

Canada Goose has gained nearly 10.6% year to date. Moreover, it has a long-term earnings growth rate of 34.1%.

Gap, with a long-term earnings growth rate of 8%, has gained nearly 3.9% year to date.

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