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Abercrombie (ANF) Climbing Up the Charts: What's the Secret?

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Apparel retailer Abercrombie & Fitch Co. (ANF - Free Report) seems to be a favorable pick at the moment with a promising future. The company has shown tremendous spirit to return to growth and profitability in recent months, which is also well reflected in its stock movement and recent earnings trend. The improvement can primarily be attributed to strategic capital investments, cost saving efforts along with loyalty and marketing programs, which are gaining traction.

These factors have aided the company to retain the Zacks Rank #3 (Hold), while carrying a VGM Score of A. Notably, shares of Abercrombie have climbed 9.1% year to date, outperforming the industry’s decline of 30.1%. That said, let’s delve deeper and find what’s driving the performance lately.

Abercrombie on Track to Revive Iconic Brands

Abercrombie remains focused on reviving its brands, enhancing performance and returning to profitable growth. Consequently, the company has been implementing several steps to spur on business forward. These initiatives include improving leadership team and organizational structure; optimizing store fleet by introducing stores in high-performing markets, while closing the underperforming ones; remodeling stores and improving assortments to meet changing trends and demands; developing omni-channel capacities and focusing on key merchandise and design processes.

We believe that the company is very much on track to bring a turnaround as management expects these efforts to revive its iconic brands along with driving notable and sustained growth.

Stellar Q2, Earnings Return to Beat Trend

The distressed specialty retailer recently reported solid second-quarter fiscal 2017 results. Notably, the results marked a return to earnings beat trend. Additionally, 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. Further, the company’s results compared favorably from the prior-year period.

Abercrombie & Fitch Company Price, Consensus and EPS Surprise

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

Though the company delivered a loss in the reported quarter, results clearly reflected a significant progress on strategic initiatives and strength in Hollister as well as direct-to-customer business, amid a highly promotional retail backdrop. Moreover, bottom-line results benefited from minimal impact from currency headwinds.

Robust Outlook Drives Estimates

Following the upbeat quarter, the company provided an encouraging view for fiscal 2017 and the fiscal second-half. The company expects comparable store sales (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.

Consequently, the Zacks Consensus Estimate witnessed positive revisions in the last 30 days. Estimates for the third quarter jumped 21.1% to 23 cents per share, while for fiscal 2017 the loss estimate of 11 cents per share was narrowed from a loss prediction of 32 cents per share.

Expanding International Operations to Boost Profitability

In the face of economic challenges, when teenagers have become less active shoppers, Abercrombie has put in effort to stay in the business by expanding international operations. To this end, the company has is on track to expand its franchise in the Middle East with its partner - Majid Al Futtaim. Recently, the company announced plans to open its first namesake store in Jeddah, Saudi Arabia in September. Additionally, Majid Al Futtaim plans to open five more flagship and three abercrombie kids stores in the Middle East region. Apart from the Middle East, the company is targeting expansion in China, evident from the opening a store in Alibaba Group’s Tmall in July 2017. We believe the company’s foray in to foreign lands is likely to enhance profitability in the long run.

Possible Deterrents

While Abercrombie has been showing some improvement lately, it is yet to steady the ship. The company is still struggling with the performance of its namesake brand, which continues to impede results. Sales for the Abercrombie brand declined 8% in the second quarter, with comps falling 7%. Though the company is making strides to improve performance at Abercrombie based on learning from Hollister, we believe full turnaround for the brand is still a long way.

Further, the company’s margins remain strained due to traffic at stores as well as a highly promotional environment. Additionally, the company’s ongoing strategic initiatives to improve profitability have been weighing on the margins. Apparently, the company gross margin, on a constant currency basis, contracted 160 basis points in the second quarter. Moreover, it expects gross margin to decline in fiscal 2017 from the prior-year rate of 61%. For the second-half of fiscal 2017, gross margin is likely to be nearly flat.

Looking for More? Check these 3 Trending Retail Stocks

Better-ranked stocks in the retail space include The Children’s Place Inc. (PLCE - Free Report) , Canada Goose Holdings Inc. (GOOS - Free Report) and Tilly’s Inc. (TLYS - 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.

Children’s Place has a long-term EPS growth rate of 9%. Further, the stock has returned 28.5% in a year.

Canada Goose has gained nearly 13% year to date. Moreover, it has a long-term earnings growth rate of 34.1%.

Tilly’s has improved 17% in a year. Further, the company has delivered an average positive earnings surprise of 83.7% in the trailing four quarters.

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