Abercrombie (ANF) Gains on Brand Strength & Lower Freight Costs
Abercrombie & Fitch ANF has been benefiting from the continued momentum in the Abercrombie brand, store-optimization efforts and lower freight costs. This led to the second consecutive quarter of an earnings and sales beat in second-quarter fiscal 2023. Net sales rose 16.2% year over year and 16% on a constant-currency basis.
The company noted that its efforts to improve the brand positioning of the Hollister brand have been paying off. Strategic investments across stores, digital and technology via its Always Forward Plan bode well.
That said, let’s delve deeper into the factors that make the stock look promising.
Factors Narrating ANF’s Growth Story
Abercrombie is working toward rationalizing its store base by reducing its dependence on underperforming tourist-driven locations. As part of its store-optimization initiatives, Abercrombie plans to reposition larger-format flagship locations to smaller omni-channel-enabled stores. Abercrombie expects 35 new stores, 20 combined remodels and rate sizes, and 30 closures for fiscal 2023.
Similarly, other retailers undertaking store expansion plans include:
Ross Stores ROST expanded its store base with the opening of 43 Ross Dress for Less stores and eight dd's DISCOUNTS stores across 22 different states in September and October. This marked the successful realization of the company's store growth plans for fiscal 2023.
Looking ahead, ROST holds an optimistic long-term view for expansion, aspiring to eventually operate at least 2,900 Ross
Dress for Less and 700 dd's DISCOUNTS locations. This forward-thinking approach reflects the company's confidence in the sustained demand for its products.
Urban Outfitters URBN remains rational in opening stores. In the first half of fiscal 2024, the company inaugurated 16 outlets, including nine Free People (including five FP Movement stores), four Urban Outfitters, two Anthropologie Group, and one Menus & Venues restaurant.
URBN shut down eight retail locations, including three Urban Outfitters, three Anthropologie Group, one Free People Group, and one Menus & Venues restaurant. In the aforementioned period, one Urban Outfitters franchisee-owned store was opened. In fiscal 2024, management plans to open 28 stores and close 21 outlets.
Nordstrom JWN unveiled its plan to open a Nordstrom Rack store in San Antonio, TX, expanding its footprint and reaching a broader customer base. The store, slated to open in fall 2024, will be located in Bandera Pointe, a popular shopping center in Bexar County.
With the inclusion of this store, alongside two openings in Denton and Allen this fall, and the recently launched outlet in San Antonio, Nordstrom is set to manage 22 Nordstrom Rack stores and 8 Nordstrom stores across Texas.
Coming back to ANF, the company witnessed favorable margin trends, mainly driven by reduced freight costs and improved average unit retail (AUR). Abercrombie’s gross margin expanded 460 bps to 62.5% in second-quarter fiscal 2023. The increase can be attributed to a 340-bps gain from lower freight costs and a 400-bps favorable impact of AUR growth, partly offset by the impacts of 180 bps from higher cotton and raw material costs, and 60 bps from adverse currency rates.
Consequently, management expects an operating margin of 8-9% for fiscal 2023, an increase from the earlier stated 5-6%. This includes gains of 250 basis points (bps) year over year, driven by reduced freight and raw material costs and a modest operating expense leverage, somewhat offset by inflation and increased operating expense investment for the 2025 Always Forward Plan initiatives, including an upgrade of its retail merchandising ERP system.
The operating margin for the third quarter is envisioned to be 8-10%, whereas it reported an adjusted operating margin of 2.4% in the prior-year quarter. This is likely due to a higher gross profit rate on lower freight costs and higher AURs, and modest operating expense leverage on higher sales.
Abercrombie envisions net sales to improve 10% year over year for fiscal 2023, up from prior mentioned 2-4% growth and our estimate of 9.5% growth. The company expects the Abercrombie brand to outperform the Hollister brand. The guidance for fiscal 2023 includes a 53rd week, which is estimated to aid sales by $45 million. The company expects sales growth in fiscal 2023 to more than offset higher expenses resulting from inflation and increased investment for the 2025 Always Forward Plan initiatives.
For third-quarter fiscal 2023, Abercrombie expects sales growth to be up year over year in the low-double digits. Sales in the fiscal third quarter are likely to include a benefit of 140 bps from foreign currency.
Also, the company is on track with its 2025 Always Forward plan, which focuses on brand growth, leveraging its omnichannel capabilities, and expanding digital penetration and financial discipline. As part of this plan, it earlier provided a financial outlook for fiscal 2025 and a long-term view. It anticipates annual revenues of $4.1-$4.3 billion and an annual operating margin rate of 8% or more by the end of fiscal 2025. For the long term, management expects annual revenues of $5 billion and an annual operating margin rate of 10% or more.
The company also predicted the Abercrombie & Fitch, and abercrombie kids brands to see a 6-8% sales CAGR over the next three years, with the Hollister and Gilly Hicks brands likely to witness a flat-to-2% and 15% sales CAGR.
Notably, Abercrombie & Fitch adults are forecast to act as the major driver. The company intends to accelerate its digital revolution via Knowing Their Customer Better and Wowing Them Everywhere initiatives. Increased investments in customer analytics to meet and outpace customer demand bode well. Lastly, the company plans to generate at least $600 million of free cash flow in the next three years to deliver healthy shareholder returns, and drive omnichannel growth across digital and physical stores.
Conclusion
We expect Abercrombie’s brand strength, store-optimization efforts and other growth strategies to aid growth. Notably, earnings estimate for the current financial year have surged 108.6% to $4.36 over the past 60 days.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Abercrombie & Fitch Company (ANF) : Free Stock Analysis Report
Nordstrom, Inc. (JWN) : Free Stock Analysis Report
Ross Stores, Inc. (ROST) : Free Stock Analysis Report
Urban Outfitters, Inc. (URBN) : Free Stock Analysis Report
