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Casual apparel retailer, Abercrombie & Fitch Co. (NYSE:ANF), is scheduled to release its fourth-quarter and full-year 2011 results on Wednesday, February 15, 2012.

The current Zacks Consensus earnings per share (EPS) estimate for the fourth quarter is $1.12, representing a decline of 18.94% from last year. The Zacks Consensus Estimate for full-year 2011 stands at $2.36 per share, reflecting a year-over-year growth of 15.05%.

In the surprises context, Abercrombie’s third quarter had witnessed a negative surprise of 21.92%. However, the company had continually delivered positive earnings surprises, outplaying the Zacks Consensus Estimate for three quarters prior to the third quarter. Despite the negative surprise in the last quarter, the company’s average surprise for the trailing four quarters comes to 37.19%.

Third-Quarter 2011 Recap

Battered by higher commodities costs, Abercrombie & Fitch Co. posted third-quarter 2011 earnings of 57 cents per share on November 16, 2011, which was substantially below the Zacks Consensus Estimate of 73 cents. However, quarterly earnings were higher than the prior-period earnings of 56 cents per share.

Abercrombie reported double-digit net sales growth of 21.0% in the reported quarter, climbing $1,075.9 million from $885.8 million in the prior-year period. Moreover, total revenue comprehensively beats the Zacks Consensus Estimate of $1,069.0 million.

The growth reflected a 14.0% increase in domestic net sales (including direct-to-consumer sales) to $820.2 million and a robust 56.0% surge in international net sales (including direct-to-consumer sales) to $255.7 million. Direct-to-consumer merchandise sales jumped 41.0% to $132.4 million in the reported quarter, reflecting continuing strength.

Overall, comparable-store sales, during the quarter, grew 7.0%. Comparable-store sales at brands Abercrombie & Fitch and Abercrombie kids rose a respective 4.0% and 6.0%, respectively. Hollister Co. also reported comparable-store sales growth of 8.0% in the quarter.

Agreement

Of the 28 analysts following the stock, 26 analysts revised their fourth quarter estimate downward in the last 30 days. There was no upward revision in the 30-day period. None of the analysts either raised or lowered their estimate in the last 7 days. For fiscal 2011, 28 out of 32 analysts, slashed estimates in the past 30 days, while 14 analysts pulled down their estimates in the last 7 days. However, there was no upside to estimates in both periods.

For fiscal 2012, 27 out of 28 analysts cut forecasts in the last 30 days, while none of them raised estimates. In the last 7 days, analysts kept their estimates intact with no movement in either direction.

Magnitude

Estimate revisions by analysts point to a substantial downside to the company’s estimates for all discussed time periods. With only negative revisions for the fourth quarter of 2011, the Zacks Consensus Estimate witnessed a drastic decline of 45 cents per share to $1.12 per share over the last 30 days. Over the last 7 days, fourth quarter estimates remained stable with no movement in analyst estimates.

For fiscal 2011, analysts cut their estimates in both 7 and 30 day periods, bringing about a decline of 20 cents per share and 41 cents per share, respectively. For fiscal 2012, majority analysts trimmed their forecasts, with no upward revisions, pulling down the Zacks Consensus Estimate by 81 cents per share to $3.49 in the last 30 days. Despite no movement in analyst estimates in fiscal 2012, the Zacks Consensus Estimate moved up by a penny in the last 7 days.

Our Take

Abercrombie, one of the leading specialty retailers of premium casual apparels in the U.S., has a strong portfolio of well-established brands. Each of these brands is focused on the unique characteristics and rapidly changing preferences of its target customers. Abercrombie leverages its sturdy line up of well established brands and their premium positioning to uphold its unique niche in the specialty retailing sector.

Looking ahead, Abercrombie remains focused on increasing its presence in international markets as a means to drive top-line growth. During fiscal 2011, the company plans to open stores in Paris, Madrid, Dusseldorf, Brussels, Dublin and Singapore under its Abercrombie & Fitch flagship chain. Apart from this, the company intends to open 40 international mall-based Hollister stores, providing a strong upside potential to the company.

Further, management’s focus on expanding global operations and improving cash flows while maintaining a healthy balance sheet bode well for future growth prospect. However, the company’s over-dependence on outside suppliers, intense competition from discount retailers and seasonality of business may undermine its future operating performance.

Abercrombie operates in a highly fragmented market and competes with national as well as regional players. Besides, competing with larger retailer like Gap Inc. (NYSE:GPS), the company also competes with value-priced specialty retailer such as Aeropostale Inc. (NYSE:ARO).

Abercrombie currently retains a short-term Zacks #3 Rank (Hold). Though cognizant of the rising retail market, we are also conscious of steep competition in this space and rising commodity prices. Therefore, we maintain a long-term Neutral recommendation on the stock.

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Source: Abercrombie & Fitch: Earnings Preview

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