Abercrombie & Fitch Co. (ANF - Free Report) has been witnessing robust growth, thanks to its capital investments, cost-saving efforts, and loyalty and marketing programs. These actions are also significantly contributing to its quarterly performances as is evident from its solid surprise history. Notably, the company reported earnings beat in the last seven quarters, with positive sales surprise in seven of the last eight quarters.
Backed by these positives, this Zacks Rank #1 (Strong Buy) stock has rallied 41.7% in the past three months, significantly outperforming the industry’s growth of 0.5%. Furthermore, the stock rallied 24.8% since its top and bottom lines beat estimates for the fourth quarter of fiscal 2018 on Mar 6. Robust stock gains were also driven by the company’s strong outlook for fiscal 2019.
Fourth-quarter fiscal 2018 gained from solid comps growth and gross margin expansion. Strength in Hollister and digital business also aided results.
Let’s get a detailed view of factors that are aiding the stock’s performance.
Digital & Omni-Channel Growth
Abercrombie made significant progress in expanding digital and omni-channel capabilities. The company’s investments in mobile, omni-channel and fulfillment significantly aided growth of its digital business. Notably, digital engagement with consumers has been its core strength. The digital business continues to perform well, backed by robust momentum across brands and geographies. Digital channel sales surged 36% in the fiscal fourth quarter while reaching a key milestone of crossing the $1-billion mark in annual sales in fiscal 2018.
Further, the company is progressing well on its goal of delivering integrated digital and in-store shopping experiences. Its ‘purchase online, pick up in store’ (POPinS) and ‘order in-store’ capabilities are delivering strong results.
Store Fleet Optimization Favors Growth
Alongside its focus on the digital business, Abercrombie is closely working on its goals of optimizing the store fleet, which has led to significant store closures in the past eight years. The company considers these closures as opportunities to improve store productivity by reducing store occupancy costs. Consequently, it closed about 29 stores in fiscal 2018, reducing total square footage by 2%. This aided improvement in a low-single digit in productivity per square foot from the fiscal 2017 level.
For the next two years, the company identified lease expirations for nearly 50% of its store base in the United States. Simultaneously, it expects to continue investing in enhancing store experiences mainly through new store prototypes, remodeled stores and right sizes. In fiscal 2019, the company plans to deliver about 85 new experiences, up from 67 delivered in fiscal 2018.
Hollister — Key Business Opportunity
The company is keen on expanding Hollister stores in new markets as the small size of operation makes it cheaper and less capital intensive option compared with its namesake brand. The Hollister brand reflects persistent positive momentum, driven by strong sales growth across all channels and geographies in fourth-quarter fiscal 2018. Comps for the brand improved 6% in the fiscal fourth quarter, marking the brand’s ninth straight quarterly growth. Impressively, Hollister is gaining from positive customer response to product innovations, emerging categories and overall customer experience.
Strong Outlook Drives Estimates
The company expects strong operating expense leverage witnessed in fiscal 2018 to continue in fiscal 2019. Consequently, it anticipates robust top-line growth, gross margin expansion and operating expense leverage, which should drive operating margin expansion in fiscal 2019.
The company estimates sales to increase 2-4% in fiscal 2019, driven by low-single-digit comparable store sales (comps) growth and contribution from new stores. Gross margin is likely to improve slightly from 60.2% recorded in fiscal 2018. Driven by these, the company believes that it is on track to deliver on its previously stated adjusted operating margin expansion target for fiscal 2020.
Backed by the robust outlook, Abercrombie’s earnings estimates for fiscal 2019 and 2020 have moved up significantly in the past seven days. The Zacks Consensus Estimate for fiscal 2019 increased nearly 35% to $1.39. Moreover, estimates for fiscal 2020 soared 69% to $1.42.
The aforementioned positives clearly suggest that the Abercrombie stock has upside potential. This view is further supported by our VGM Score of A and a long-term earnings growth rate of 15.3%. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1 or 2 (Buy) offer the best investment opportunities.
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Foot Locker, Inc. (FL - Free Report) has long-term earnings per share growth rate of 9.2% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Canada Goose Holdings Inc. (GOOS - Free Report) has long-term earnings per share growth rate of 31.3% and a Zacks Rank #2.
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