Friday morning, teen clothing retailer Abercrombie & Fitch (ANF) announced fourth quarter results, a dividend hike, and a change in method of accounting for inventory. Revenue increased 11% year-over-year to $1.5 billion, falling slightly below consensus expectations. Earnings per share easily exceeded expectations under the retail method, growing 97% year-over-year to $2.21 per share. Under the cost method, which Abercrombie will use going forward, they grew nearly 10 fold year-over-year to $2.15 per share.
Abercrombie's new accounting method is designed to more accurately reflect gross margins and provide greater consistency with respect to inventory. Although the move will cause us to adjust our financial model, we think it will more accurately reflect the company's operating performance. We don't see it as a red flag by any means. Importantly, however, we do not expect to change our fair value estimate as a result of this accounting change. Firms cannot create or destroy economic value on the basis of how they account for operations. Cash flow remains the key value driver and is largely unaffected under accounting regime changes.
Abercrombie also boosted its quarterly dividend 14% to $0.20 per share-giving shares an annual yield of 1.7% at current levels. The company has sufficient cash on hand, and its solid free cash flow generation has allowed it to return piles of cash to shareholders via buybacks and dividends. We wouldn't be surprised to see the dividend continue to rise.
In the firm's fourth quarter, we saw ongoing weakness in both its domestic and international businesses. Total comparable sales fell 1% during the quarter, as a 17% increase in comparable direct-to-consumer sales failed to completely offset a 4% decline in same-store sales. Comparable sales in the US were flat, revealing some stabilization from previous trends (but the store base is now smaller). US same-store sales declined 1%, but direct-to-consumer sales advanced 5%.
The international segment performed similarly, with comparable sales decreasing 3%. International same-store sales fell 14%, which was partially offset by 52% direct-to-consumer growth. We don't believe the brand has quite recovered from the depths of the financial crisis, and it seems--based on both international results and results at Abercrombie tourist locations--that the brand has lost some of its international appeal.
Looking ahead, the firm is anticipating full-year earnings of $3.35-$3.45 per share, an increase of 4%-7%. Abercrombie will close 40-50 stores in the US (as leases expire) but open 20 Hollister locations internationally and 2 Abercrombie flagship stores in Seoul and Shanghai. We don't see much growth ahead, though free cash flow could remain strong as the company plans to allocate just $200 million on capital expenditures in 2013. Nevertheless, we think shares are fairly valued, and we generally avoid teen retailers in the portfolio of our Best Ideas Newsletter.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.