Abercrombie Earnings Show Weakness, Gap Appears To Have Further Upside

Includes: ANF, GPS
by: David Ristau

Company Name: The Gap, Inc (NYSE:GPS)

Reported EPS: $0.71

Consensus EPS: $0.69

Reported Revenue: $3.73B

Key Stats:

Cash Flow From Operations: $356M

Cash Flow From Operations One Year Ago: $364M

Cash Flow From Operations Decrease: 2%

Long Term Debt: $1,247M

Long Term Debt One Year Ago: $1,566

YoY Long Term Debt Decrease: 20%

Gap Beats Consensus And Continues To Look Good Into the Near Future.

Reporting earnings on May 23, Gap beat consensus by $0.02 as well as reporting revenue above what was expected. This solid earnings period was judged to be a result of increased same-store-sales in all of their brands- Gap, Banana Republic, and Old Navy. Gap also continues to open new stores around the world for all their brands affirming its goal of becoming a world leader in the apparel sector.

Net sales for GAP increased around 6.9% ($3,487M in 2012 compared to $3,729M in 2013) compared to same quarter in the previous year. Cash Flow from Operations had a slight decrease of 2% but this is not large enough for it to be a worry.

One of the main positives this quarter was that Gross profits also rose YoY by 12.9% This increase in gross profit was more as result of an increase in net sales than a decrease in costs of goods sold. This increase in net sales, as mentioned, may be attributed to the small success of all of Gap's brands this quarter. Same-store-sales are up in all brands and this will reflect in net sales and ultimately earnings.

One problem that we do see with Gap is that this year it still has not announced any product that differentiates itself from its peer group. Last year the 'in-thing' was the colorful denim jeans that Gap offered and as these were successful so was the company.


Gap expects to open about 160 new stores in the FY2013. These new stores will be focused on the Athleta brand, Gap China, Old Navy Japan and a few other global outlets. It also expects to close about 80 stores in the US as over saturation of the apparel market has continued to occur.

Operating margins are expected to decrease to around 13% from 14.2% that they are currently at while full year EPS guidance is between $2.52 and $2.60.

Company Name: Abercrombie & Fitch Co. (NYSE:ANF)

Reported EPS: $(0.09)

Consensus EPS: $(0.05)

Reported Revenue: $838.8M

Consensus Revenue: $941.66M

Key Stats:

Current Same-Store-Sales: -17%

Same-Store-Sales One Year Ago: -5%

Current Inventories: $458,630

Inventories One Year Ago: $592,217

YoY Inventory Decrease: -22.5%

Earning Prove To Be a Continuation Of a Rough Month for Abercrombie & Fitch

ANF's recent earnings were not solid, and things are not looking goof moving forward. With the Abercrombie & Fitch brand being cast in a negative light in the news this month as result of previous comments by CEO Mike Jeffries that stated that A&F would not offer plus sizes for women and that "cool kids" should wear their products, positive earnings would have been a great way to counteract this highly negative publicity. The only problem was that earnings reported last week were not great and instead of providing A&F with some respite only added to the negative month and current image

Reported EPS this quarter was -0.09, missing consensus by $0.04 and reported revenue was well below expectations. Net sales dropped by 9% to $838.8M from $921.2M last year. The decrease in net sales is a sum effect of a decrease in same-store-sales in the US of 14% and a decrease in same-store-sales in international stores of 16% to give a total decrease in same-store-sales of -12% compared to the same point last year.

Another main problem for Abercrombie & Fitch is that their decreases in revenues are occurring in all segments of the company. For example there was a decrease of $73M for Abercrombie for kids, and an even higher decrease of $421M for Hollister Co. coupled with decreases elsewhere. This doesn't bode well for the company as in the next quarter they might start seeing the effects of the comments made by the CEO.

Abercrombie & Fitch states that these dismal earnings are a result of an inventory shortage throughout this quarter in all of their business segments, but we believe recent comments as well as style trends have hurt ANF.


Abercrombie & Fitch doesn't look good for future earnings. The company is already bracing itself for this by announcing it has a "more cautious view for the remainder of the year." Projections on diluted EPS for FY2013 are now between $3.15 to $3.25. These low projections take into account a decrease in same-store-sales for the rest of the year. Store closure is also expected during this time as a result of low demand for products. It is estimated that during FY2013, Abercrombie & Fitch expects to close 40-50 stores in the United States that would not be directly replaced.

Abercrombie & Fitch did mention that it expects to open new international stores in Seoul and Shanghai and maybe these markets might respond more positively than the way the US market is currently responding.

With these new store openings and the investment into new IT technologies, ANF expects to keep capital expenditures around $200M.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article