Seeking Alpha
Special situations, long-term horizon, growth, research analyst
Profile| Send Message|
( followers)  

Summary

  • ANF beat expectations on earnings but came in below revenue estimates.
  • The company reported solid guidance for the rest of the year.
  • Like many retailers, the company is dealing with the transition to online sales growth.

Background

On August 28, 2014, Abercrombie & Fitch Co.(NYSE: ANF) reported 2Q 2014 net income of $12.9 million ($0.17 per share) on sales of $891 million, compared to net income of $11.4 million ($0.14 per share) on sales of $946 million in the same period last year. These numbers beat Estimize-reported consensus earnings estimates of $0.10 per share but came in below sales estimates of $908 million.

These numbers are based on an outstanding share count of 73.75 million and 79.27 in 2014 and 2013 respectively.

Abercrombie & Fitch Co. is a specialty retailer of casual clothing and accessories for men, women, and children. Its primary products include graphic t-shirts, jeans, fleeces and outerwear. Its primary brands are Abercrombie & Fitch and Hollister. The company currently operates 842 stores in the United States and 157 internationally. It was founded in 1892 and currently employs about 9,000 people. Its primary competitors include American Eagle Outfitters (NYSE: AEO) and The Gap (NYSE: GPS).

Key Points

  • US same-store sales down 5%, international same-store sales down 9%
  • 62.1% gross profit rate
  • $426 million in store expenses (47.9% of sales) vs. $472 million last year (49.9%)
  • Marketing, general & administrative expenses of $111 million vs. $118 million last year
  • Effective tax rate of 29.2%
  • $311 million in cash and cash equivalents
  • Repurchased 1.5 million shares @ $60 per share. Year to date buybacks of 5.3 million shares

Guidance

  • Full year diluted EPS to be between $2.15 and $2.35
  • Expect same-store sales to be down mid-mingle-digits
  • Full-year effective tax rate in the mid-30s
  • Weighted average share count to be 73.6 million shares
  • About 60 store closings in 2015 and 2016

What to look for in Q3

Store closures and Direct to customer business

Management stated that the company expects to close about 60 US stores, reflecting the company's shift towards expanding sales through its direct-to-customer business. Many of the company's stores are located in large malls and shopping centers, and as such, a lot of their store traffic is driven by customers who visit the mall to shop at large anchor stores such as Sears.

Product and branding changes

The company has begun removing its logos from its clothes, which is a major change for a company that has previously been able to sell so well based on its signature logos. It will be interesting to see how effective this new product strategy is with its target consumers, as it is a major change to the core product itself.

Quick Take

Management was terse and professional with its pre-prepared remarks, which included earnings guidance and details regarding same-store sales, product mix, and the company's development of its direct-to-customer business. I would have liked to hear more quantifiable results regarding the online sales, as same-store sales were down in the period - it is clear that most retail companies need to expand their online offerings, so what A&F is doing is nothing unique in the sector.

I was excited that management provided full-year earnings guidance - transparency here is great, and it gives me some insight as to how confident management is in its go-forward strategy. Additionally, it shows that they have been seeing some feedback on their strategy, at least enough to make a forecast from.

One of the major product shifts that the company has initiated is removing the prominent Abercrombie & Fitch logos from its US clothing, reflecting a major change in consumer tastes. It will be interesting to see how the company manages to stay with consumer trends. In the past, A&F has been one of the biggest brand names among teenagers, and it will be interesting to see if it can maintain its status among this set of customers.

I would have liked to see a bit more color with regard to the company's direct-to-customer business, which management emphasized that it wanted to grow aggressively - some numbers here would have given us more clarity when assessing the company's strategy.

Transcript from Seeking Alpha available here, company 8-K available here.

Source: Breaking It Down: Abercrombie & Fitch's Q2 2014 Earnings Call