Abercrombie - Shop Till You Drop

| About: Abercrombie & (ANF)

Shares of Abercrombie & Fitch (ANF) fell more than 15% in after hours trading on Wednesday after the apparel company announced its preliminary second quarter results and cut its full year outlook.

Second Quarter Results

Abercrombie, the apparel store for women, men and kids announced a 4% year-on-year sales increase in second quarter revenues to $951.4 million. Analysts were expecting the company to report revenues of $1 billion for the quarter. Final earnings have not been confirmed yet, but Abercrombie expects to report second quarter earnings between $0.15-$0.18 per share. Lower sales growth and margin gross margin erosion are eating into profits.

The definitive results will be published in two weeks time, on August 15th to be precise.

CEO and Chairman Mike Jeffries commented, "macroeconomic conditions remained very challenging during the quarter, particularly in Europe but also increasingly in the US." He added that the company will only invest if stores generate stronger return than alternative sources of cash, which has been the case for its international investments so far.

Segmental Information

Abercrombie's results were severely impacted by a weak performance in the United States. Total US sales fell 5% to $648.0 million, driven by a 5% decline in comparable store sales.

International sales rose 31% to $303.4 million, despite an incredible 26% decline in international comparable store sales. To make matters even worse, comparable sales growth for the group came in at minus 10%, and comparable growth rates were the weakest in June.


For the full year of 2012 Abercrombie now expects earnings per share between $2.50 and $2.75. This compares to a prior projection of annual earnings of $3.50-$3.75 per share. The company expects same store sales to fall by a similar 10% for the second half of 2012. Besides lower sales, earnings are also impacted by a stronger US dollar and a higher effective tax rate. International operations, which are taxed at lower corporate tax rates are less profitable than expected.

Furthermore Abercrombie will reduce the pace of its international expansion. It will reduce the number of Hollister chain store openings from 40 to 30 for the full year of 2012. It will pause with the expansion of its flagship stores with the exception of Shanghai. Future growth will focus on under-penetrated markets which face less cannibalizing effects. As a result, this year's capital expenditure budget of $360 million will be reduced to $200 million for the full year of 2013.


Abercrombie ended its first quarter with roughly $360 million in cash, equivalents and marketable securities. It operates with $66 million in long term debt for a net cash position of roughly $300 million. In the first six months of 2012 the company generated revenues of $1.87 billion, on which it is expected to earn $0.20 per share. Based on the company's outlook, Abercrombie is on track to surpass the annual revenues mark of $4 billion on which its expects to earn $2.50-$2.75 per share.

Factoring in a 15% decline in after hours trading, the market values Abercrombie around $2.4 billion, or $2.1 billion for its operating assets. This values the apparel retailer at merely 0.5 times annual revenues and around 9 times earnings. This compares to revenue multiples of 1.8 times for Urban Outfitters (URBN), 1.3 times for American Eagle (AEO) and 1.0 times for The Gap (GPS). These competitors trade at 26, 25 and 18 times their trailing annual earnings, respectively.

Currently Abercrombie & Fitch pays a quarterly dividend of $0.17 per share, for an annual dividend yield of around 2.5%.

Investment Thesis

Shares of Abercrombie & Fitch trade around the $28 level in after hours trading, marking year to date losses of around 40%. Shares traded as high as $53 in May but saw an almost 50% correction as investors worried about the impact of the European debt crisis on the company's European operations. Today's profit warning confirms that consumer weakness has hit the US as well as comparable store sales are falling. Earlier this earnings season the likes of McDonalds (MDS), Chipotle Mexican Group (CMG), Coach (COH), Starbucks (SBUX) and UPS (UPS) already warned for a significant slowdown in US consumer spending.

The good news for investors, or better, prospective investors in Abercrombie & Fitch, is that shares have already corrected some 70% from their peak of $77 in 2011. While the short term prospects look anything but rosy, shares are offered at discounts you might never see in the company's stores.

For long term investors these are the times to go shopping.

Disclosure: I am short CMG.