By Brian Sozzi
Go ahead Abercrombie & Fitch (ANF) investors, brush your shoulder off. There was a significant probability for a blowout, sexy quarter from Abercrombie & Fitch yesterday (intangible analysis: wide dispersion around mean EPS estimates as modeling has become more difficult minus monthly sales releases), despite the onset of less sexy 1Q11 results from many retailers in the last two weeks. Abercrombie & Fitch's EPS beat of $0.16, or $0.11 to our modeling, was fueled by an easy comparable store sales comparison at Hollister and increased penetration of international sales (23.6% of total) and online (12.6% of total). Note online allows Abercrombie & Fitch to offer profit-enhancing flagship exclusives, while products at Abercrombie & Fitch international flagships are priced at a juicy premium to those offered domestically.
At the heart of the sales and margin performance is none other than merchandise teens clamored for this spring, and in the case of Abercrombie & Fitch it meant floral print skirts for girls or men's button down shirts with built in hoods. The consumer, usually mom and dad shelling out the bucks at the cash register, is perceiving the company's products to offer good value; basically while others in teen apparel have removed product quality to combat cost inflation and raised prices on those cheaper blends, Abercrombie & Fitch has maintained quality and prices in some classifications (though price increases will be on the horizon in a more pronounced manner going into back to school and holiday).
Key Call Outs:
* Gross margin surpassed consensus by 282 bps. There is a sense that 1Q11 will be the high water mark for Abercrombie & Fitch's gross margin as drivers such as lower average unit costs and freight benefits vanish amid a world of inflationary pressures; international and domestic price increases will bear the burden of keeping the company's gross margin afloat to a degree. However, management's color regarding the FY11 outlook is very consistent to commentary made at analyst day in April, that is 2H11 earnings will be pushed along by leverage on expenses as unproductive stores are closed, Hollister reaches greater mass internationally, and Abercrombie & Fitch flagship destinations open their doors. Commentary on 2Q11 margins also remained consistent.
* Sales growth was almost 2x inventory growth. One word, finally.