Abercrombie & Fitch - Strong Quarter Gives Investors An Opportunity To Take Profits

Nov.15.12 | About: Abercrombie & (ANF)

Shares of Abercrombie & Fitch (ANF) rose more than 34% in Wednesday's trading session. The specialty retailer focused on casual apparel reported its third quarter results before the market open.

Third Quarter Results

Abercrombie & Fitch reported third quarter revenues of $1.17 billion, up 8.7% on the year. Analysts expected Abercrombie to report quarterly revenues of $1.11 billion.

Total US sales, including direct-to-consumer sales were approximately flat at $818.6 million. International sales rose 37% to $351.1 million. Comparable store sales fell 3% on the year, driven by weakness in the main Abercrombie brand. US same store sales were up 2%, while international same store sales fell by 18% on the year.

Gross profits increased by 240 basis points on the year to 62.5%. A decrease in costs and a favorable international sales mix boosted margins.

The company net earned $71.5 million, up 40.5% on the year. The company net earned $0.87 per diluted share, compared to earnings of $0.57 per share in the third quarter last year. Earnings comfortably beat the analysts consensus of $0.60 per share.

The company ended the third quarter with 1,067 stores. The company opened 12 new stores during the quarter.

During the quarter, Abercrombie repurchased 3.0 million shares for a total consideration of $104.3 million. The company has 19.9 million shares remaining under its current repurchase authorization.

CEO and Chairman Mike Jefferies commented on the results, "These significant improved financial results reflect progress on several fronts over the past quarter. Our US chain store business posted healthy growth on top of a strong quarter a year ago, and we saw sequential trend improvement in our international business. Our principal focus remains to execute against our key strategic initiatives to leverage our iconic brands and to continue to be judicious in our use of our shareholders' capital to drive long-term shareholder value."


Based on the strong third quarter results, Abercrombie is raising its full year earnings per share target towards $2.85 to $3.00 per share. Previously, Abercrombie guided for annual earnings of $2.50 to $2.75 per share. Analysts expected Abercrombie to guide for full year earnings of $2.50 per share.

The outlook assumes a mid single digit percentage decrease in comparable store sales in the fourth quarter and a slightly higher gross margin rate.

The earnings guidance excludes the impact of potential impairment charges, or real estate charges.


Abercrombie & Fitch ended its third quarter with $370 million in cash, equivalents and marketable securities. The company operates with roughly $125 million in debt and leasehold financing obligations, for a net cash position of $245 million.

For the first nine months of 2012, Abercrombie generated revenues of $3.04 billion. The company net earned $90.0 million, or $1.07 per diluted share. Abercrombie is on track to report annual revenues north of $4.3 billion, with earnings coming in around $240 million.

Factoring in an almost 35% jump on Wednesday, the market values the firm at $3.5 billion. This values the operating assets at roughly $3.4 billion. The valuation values the firm's assets at roughly 0.7 times annual revenues and 13-14 times annual earnings.

The company pays a quarterly dividend of $0.175 per share, for an annual dividend yield of 1.7%.

Investment Thesis

Year to date, shares of Abercrombie & Fitch have fallen some 15%, despite the gains on Wednesday. Shares of Abercrombie started the year around $49 per share and fell to lows of $30 in the summer. Shares spiked up after Wednesday's strong third quarter results, currently exchanging hands at $42 per share.

Over a longer time period, shares have fallen from highs of $80 in 2008 to lows of $20 during the financial crisis in 2009. Shares eventually recovered to $75 in 2011, before falling back again. Between 2008 and 2012, revenues grew from $3.5 billion to an estimated $4.3 billion in 2012. Net income fell from $272 million in 2009, to an estimated $240 million this year.

The third quarter report has blown analysts and investors away. Comparable sales fell by 3% during the quarter, compared to a 8% decline in the first half of 2012. Abercrombie previously guided for comparable store sales declines of 10% in the second half of 2012. At the moment, it guides for same store sales to decline in the mid single digits for the final fourth quarter. Gross margins were strong as inventory levels fell, giving the company sufficient pricing power.

Abercrombie attributes the strong third quarter revenues and earnings to improvements in its operations. The company is trying to shorten lead-times, diversify offerings and moving away from logo branded clothing.

In August of the year, I urged investors to go shopping for the company's shares. Shares rose almost 40% from those levels in just three months. At these levels I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.