A month has gone by since the last earnings report for Abercrombie & Fitch (ANF - Free Report) . Shares have added about 3.4% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Abercrombie due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Abercrombie Q4 Earnings & Sales Beat, FY19 View Robust
Abercrombie & Fitch reported solid fourth-quarter fiscal 2018 results, wherein top and bottom lines beat estimates. This marked the company’s seventh consecutive quarter of positive earnings surprise while sales topped estimates in seven out of the last eight quarters. However, earnings and sales declined year over year, owing to negative effects from a calendar shift, an additional 53rd week in fiscal 2017 and adverse currency rates.
Nonetheless, the company provided a robust outlook for fiscal 2019 as it expects the momentum from strong top-line growth, gross margin expansion and operating expense leverage witnessed in fiscal 2018 to continue.
Q4 Earnings & Sales
Abercrombie posted adjusted earnings of $1.35 per share, beating the Zacks Consensus Estimate of $1.12 but down 2.2% from $1.38 in the year-ago quarter. On a reported basis, the company delivered earnings per share of $1.42 compared with $1.05 in the year-ago period.
Net sales of $1,155.6 million surpassed the Zacks Consensus Estimate of $1,135 million but declined 3.2% from the year-ago quarter’s sales of $1,193.2 million. This year-over-year decline was mainly attributed to an adverse impact of nearly $60 million from a calendar shift and loss of an extra 53rd week in fiscal 2017 as well as negative impact of $15 million from adverse foreign currency rates. On a combined basis, these adversities affected the company’s sales by nearly 6%.
Brand-wise, net sales improved 1% to $712.9 million at Hollister while it dipped 9% to $442.7 million for the Abercrombie brand. From a geographical viewpoint, net sales grew 1% in the United States while dropped 10% in international markets.
Notably, digital business continued to perform well, backed by robust momentum across both brands and geographies. Digital channel sales surged 36% in the fiscal fourth quarter while reaching a milestone of crossing the $1-billion mark in annual sales.
Comps in Detail
Comps increased 3% in the fiscal fourth quarter on the back of strong cross-channel traffic, owing to the positive outcome of the company’s marketing and loyalty investments. Brand-wise, comps were a positive 6% for Hollister but it declined 2% for Abercrombie mainly due to weakness in women’s tops and dresses. Notably, this marked the sixth consecutive quarter of comps growth for the company and the ninth straight quarter of positive comps for Hollister.
Comps growth was mainly driven by strong performance in the United States, wherein comps improved 5%. This was partly offset by 2% comps decline in international markets.
Gross margin of 59.1% in the fiscal fourth quarter improved 70 basis points (bps) from the prior-year quarter. Moreover, gross profit margin expanded 20 bps on a constant-currency basis due to a slightly lower increase in average unit costs (AUC) and almost flat average unit retail (AUR).
Abercrombie reported adjusted operating income of $129.7 million, reflecting a decline of 12.6% from the prior-year quarter. The decline mainly stemmed from an operating expense deleverage of 30 bps. Adjusted operating margin of 11.2% contracted 120 bps from the year-ago quarter.
Abercrombie ended fiscal 2018 with cash and cash equivalents of $723.1 million, and gross borrowings under its term-loan agreement of $253.3 million. As of Feb 2, 2019, inventories were $437.9 million, reflecting growth of 3% from the prior-year period.
Moreover, the company returned about $122.4 million to shareholders through share buybacks and dividends in fiscal 2018. It bought back 2.9 million shares in the fiscal year.
On Feb 22, the company declared a quarterly dividend of 20 cents per share on the Class A shares. This is payable on Mar 18 to shareholders of record as of Mar 8.
At the end of the fiscal first quarter, Abercrombie expects inventory to be at a low-single digit as it leverages ongoing transformation initiatives to improve long-term inventory productivity.
In the fiscal fourth quarter, the company opened six stores, including four Hollister and 2 Abercrombie outlets. Further, it closed nearly 24 stores in the United States, which comprised 15 Abercrombie and nine Hollister stores.
The company has been closely working on its goals of optimizing store fleet, which led to significant store closures in the past eight years. However, it takes these closures as an opportunity to improve store productivity by reducing store occupancy costs. Consequently, the company closed about 29 stores in fiscal 2018, reducing total square footage by 2%. This aided a low-single-digit improvement in productivity per square foot from the fiscal 2017 level.
As part of its continued focus on optimizing store fleet, Abercrombie identified lease expirations for nearly 50% of its store base in the United States in the next two years. As a result, the company plans to close up to 40 stores in fiscal 2019, after evaluation. 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, including mainly remodels.
Abercrombie continues to anticipate strong top-line growth, gross margin expansion and operating expense leverage in fiscal 2019, which should drive operating margin expansion. Notably, the company witnessed operating expense leverage of 130 bps in fiscal 2018, resulting in operating margin expansion of 100 bps. Expecting this momentum to continue, it believes that it is on track to deliver on the previously stated adjusted operating margin expansion target for fiscal 2020.
For fiscal 2019, the company estimates sales to increase 2-4%, driven by low-single-digit comps growth and contribution from new stores. However, unfavorable foreign currency rate is expected to mar top-line results by nearly $15 million, which is likely to occur in the fiscal first quarter.
The company expects gross margin to improve slightly from 60.2% recorded in fiscal 2018. The upside will likely stem from higher AUR, including adverse currency impacts, partly offset by higher AUCs. However, the guidance excludes effects of potential rise in China tariffs on apparel. To play it safe, the company estimates reducing sourcing of China goods to the United States. It expects to reduce the inflow from China to less than 20% in fiscal 2019 compared with about 25% in fiscal 2018.
Operating expenses, excluding other operating income, are expected to increase nearly 2% from $2.03 billion of adjusted operating expenses recorded in fiscal 2018. Furthermore, it expects effective tax rate to be in the mid-to-upper 20s range.
Additionally, the company envisions capital expenditure of roughly $200 million for fiscal 2019 marking an increase from $152 million in fiscal 2018. This will likely include $120 million for stores, and nearly $80 million for digital and technology investments.
For the fiscal first quarter, the company anticipates sales to be flat from the prior-year quarter. This includes an adverse impact of nearly $15 million from negative currency translations. Comps are anticipated to remain flat or increase up to 2%. Gross margin is likely to be flat or up slightly from 50.5% reported in the first quarter of fiscal 2018.
Operating expenses (excluding other operating income) are estimated to be flat to adjusted operating expenses of $482 million in first-quarter fiscal 2018. Effective tax rate is anticipated in the mid-to-upper 20s range.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 6.86% due to these changes.
Currently, Abercrombie has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Abercrombie has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.