Earnings Preview: Abercrombie

Zacks

Abercrombie & Fitch Co. (ANF), a specialty retailer of premium, high quality casual apparel, will release its first-quarter 2012 financial results on Wednesday, May 16, 2012.

The current Zacks Consensus Estimate of 1 cent a share for the quarter reflects a decline of 96.3% from the comparable prior-year quarter’s earnings of 27 cents per share. The estimates in the current Zacks Consensus range between a low of negative 3 cents and a high of positive 10 cents a share. The Zacks Consensus Revenue Estimate is $1.05 billion for the quarter under discussion.

The sluggish average unit revenues (AURs) and higher average unit costs (:AUC) in the fourth quarter of 2011 put considerable pressure on margins, leading to a fall of 78.9% in profits to $19.6 million from $92.6 million in the year-ago period.

Moreover, the company anticipates poor sales and AUR trends for fiscal 2012 to be offset considerably by the reversing of AUC trends in the latter half of 2012. Therefore, the above-mentioned factors brought a drastic revision in the analysts’ estimates for the quarter under review.

Recap of the Fourth Quarter and Fiscal Year 2011

The company’s fourth quarter adjusted earnings of $1.12 per share came in line with the Zacks Consensus Estimate. However, quarterly earnings were down 18.8% from the year-ago quarter’s earnings of $1.38 per share. For full-year 2011, the company’s adjusted earnings came in at $2.31 per share, missing the Zacks Consensus Estimate of $2.33 per share, but well ahead of the earnings of $2.05 per share in the year-ago period.

Abercrombie reported double-digit net sales growth of 16% in the reported quarter, reaching $1.33 billion from $1.15 billion in the prior-year quarter, almost in line with the Zacks Consensus Estimate, reflecting a 4% rise in domestic sales and a robust 62% surge in international net sales.

Full-year revenue at Abercrombie was $4.16 billion, up 20% year over year and almost in line with the Zacks Consensus Estimate. The year-over-year increase was attributable to a 10% increase in domestic sales and a whopping 63% rise in international sales. The company’s net direct-to-customer sales for the year witnessed an increase of 36% to $552.6 million.

Comparable store sales for the year were 5% higher than last year, reflecting a 3% comps increase at Abercrombie & Fitch, a 4% surge at Abercrombie kids and an 8% rise at Hollister Co.

Guidance

Going forward, Abercrombie expects earnings per share for fiscal 2012 to come in the range of $3.50 to $3.75. The company expects to incur capital expenditure of nearly $400 million in fiscal 2012, primarily due to new store openings and investments in the distribution center and direct-to-consumer operations.

Zacks Agreement & Magnitude

Out of the 27 analysts covering the stock for the current quarter, only one of the analysts raised the estimate in the last 7 or 30 days. However, while none of the analysts lowered their estimates in the last 7 days, we see one downward revision in the last 30 days. As a result, the Zacks Consensus Estimate remains unchanged at 1 cent per share.

Mixed Earnings Surprise History

With respect to earnings surprises, Abercrombie has topped the Zacks Consensus Estimate in three of the last four quarters. The earnings surprise ranges from a low of negative 21.9% and a high of positive 145.5%, with the average at 48.1%. This implies that the company has beaten the Zacks Consensus Estimate by around 48% over the past four quarters.

Neutral on Abercrombie

Abercrombie has a strong portfolio of well-established brands, each of which is focused on the unique characteristics and rapidly changing preferences of its target customers. In the face of economic challenges, where teenagers have become less active shoppers, Abercrombie has pulled up its socks to remain in business.

The company’s debt-free balance sheet offers flexibility to drive future growth. Moreover, the company continues to actively indulge in capital spending on store openings and remodeling along with investments in information technology, distribution centers and other home office projects.

Abercrombie does not own or operate any manufacturing facility and therefore purchases all its merchandise requirements from outside. The company’s operation may be adversely affected if these manufacturers are not able to ship orders on time or meet its standards.

Abercrombie operates in a highly fragmented market and competes with national as well as regional players. Furthermore, apart from larger retailers such as Gap Inc. (GPS), Abercrombie is facing increasing competition from value-priced specialty retailers such as Aeropostale Inc. (ARO) and Buckle Inc. (BKE).

Therefore, the company carries a Zacks #3 Rank implying short-term Hold rating, and we retain our long-term Neutral recommendation on the stock.

Read the Full Research Report on ANF

Read the Full Research Report on ARO

Read the Full Research Report on GPS

Read the Full Research Report on BKE

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