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Abercrombie (ANF) Q2 Earnings Beat, Bleak Q3 View Hurts Stock

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Abercrombie & Fitch Co. ANF reported better-than-expected earnings per share for second-quarter fiscal 2021, while sales missed the Zacks Consensus Estimate. However, its earnings and sales improved year over year. The company also reported strong growth in key metrics on a two-year basis (compared with second-quarter fiscal 2019), reflecting robust growth from the pre-pandemic levels.

Shares of Abercrombie slumped 10.4% yesterday after the company reported lower-than-expected top-line numbers for second-quarter fiscal 2021. The expectations of impacts of supply-chain disruptions and higher freight costs on its third-quarter and fiscal 2021 results also hurt sentiment.

Shares of the Zacks Rank #1 (Strong Buy) company have rallied 75.3% year to date compared with the industry's growth of 13.9%.

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Abercrombie delivered adjusted earnings of $1.70 per share in second-quarter fiscal 2021, increasing substantially from 23 cents earned in the year-ago quarter. Earnings also surpassed the Zacks Consensus Estimate of 75 cents. Earnings growth demonstrates the company’s robust digital sales momentum coupled with gross margin expansion and tight expense management.

Total net sales of $864.9 million advanced 23.9% year over year and 3% from second-quarter fiscal 2019 but missed the Zacks Consensus Estimate of $878.3 million. Top-line improvement was led by robust growth witnessed in the United States, the company’s largest market. Strong digital momentum and penetration also contributed to the upside. Net sales in the United States improved 31% year over year and 11% on a two-year basis on the back of strong customer retention, increased spending by customers and the addition of customers.

Abercrombie & Fitch Company Price, Consensus and EPS Surprise

Abercrombie & Fitch Company Price, Consensus and EPS Surprise
Abercrombie & Fitch Company Price, Consensus and EPS Surprise

Abercrombie & Fitch Company price-consensus-eps-surprise-chart | Abercrombie & Fitch Company Quote

Digital sales continued to be strong in the fiscal second quarter despite the reopening of stores. As customers returned to stores, digital sales remained flat with the year-ago period and improved 52% from second-quarter fiscal 2019 to $376 million. Digital sales contributed about 44% to total sales in second-quarter fiscal 2021.

The company’s top line has also been benefiting from the reopening of stores across all regions, except for EMEA, where restrictions continue. It witnessed improvement in store performance, with global store sales improving 55% year over year in the fiscal second quarter. However, on a two-year basis, store sales declined 20%. The company witnessed year-over-year growth despite permanent store closures as well as ongoing restrictions in EMEA. It permanently closed 137 locations, representing 1.1 million productive gross square feet of its store base in fiscal 2020. As of Aug 26, 2021, all of the company’s stores were operational.

Brand-wise, net sales advanced 20% year over year to $514.5 million and 30% year over year to $350.4 million, respectively, for Hollister and Abercrombie. On a two-year basis, net sales increased 2% for Hollister and 4% for Abercrombie. From a geographical viewpoint, net sales rose 31% in the United States and 10% in the International markets, including 11% growth in EMEA and a 1% decline in APAC. On a two-year basis, net sales rose 11% in the United States and declined 5% in the International markets.

Gross margin of 65.2% expanded 450 basis points (bps) year over year and 590 bps on a two-year basis, driven by strong sales growth and a double-digit increase in average unit retail (AUR) on lower promotions, partly offset by higher average unit cost (AUC) due to increased transportation costs. This marked the company’s best second-quarter gross margin since 2009. AUR growth was attributed to reduced promotions from the last quarter and the last year. The company continues to maintain adequate inventory levels.

Adjusted operating expenses, net, increased 9% year over year and 11% on a two-year basis. The increase mainly resulted from a rise in payroll and customer-facing expenses, offset by a decline in store occupancy. Gains from store occupancy were partly offset by increased shipping and fulfillment expenses. Adjusted operating expense rate declined 580 bps year over year to 52%.

Adjusted operating income totaled $116 million as compared with $22 million in the year-ago quarter. The robust sales and gross margin expansion along with tight expense controls resulted in operating margin expansion of 1,130 bps year over year and 1,800 bps on a two-year basis to 13.4%.

Other Financials

Abercrombie ended the reported quarter with cash and cash equivalents of $921.5 million, and long-term gross borrowings (under senior secured notes) of $308 million. Inventories were $415.6 million, down 8.3% from the prior-year quarter. The company had available liquidity of $1.2 billion as of Jul 31, 2021. Its liquidity comprised cash and equivalents as well as borrowings available under the senior secured asset-based revolving credit facility of nearly $249 million.

As of Jul 31, 2021, net cash provided by operating activities amounted to $50 million. Capital expenditure in the first half of fiscal 2021 was $35.3 million.

For fiscal 2021, the company expects capital expenditure of $100 million, whereas it spent $102 in fiscal 2020. About 50% of the capital spending is expected to be used for investments in digital and technology.

In second-quarter fiscal 2021, the company repurchased 2.4 million shares for $100 million. In the first half of fiscal 2021, it has returned $135 million to shareholders in the form of share repurchases. As of Jul 31, 2021, it had 6.5 million shares available for repurchase under its prior authorization approved in February 2021.

Store Update

In second-quarter fiscal 2021, the company opened 14 stores and closed 12 locations. This brings the total year-to-date store openings to 18 and closures to 20. As of Jul 31, 2021, the company’s total store base was 733, including 534 stores in the United States and 199 stores internationally.

In the second half of fiscal 2021, the company plans to open about 20 stores, bringing the total for the fiscal year to 40.

Outlook

Going forward, the company plans to remain on track and leverage some of its structural cost-savings to boost top-line growth through investments in brand marketing, digital experience, and growing Gilly Hicks and Social Tourist brands. While it expects supply-chain disruptions, and cost and delays associated with it to persist, it expects to maintain inventory discipline.

The company is encouraged by the strong performance in the initial part of third-quarter fiscal 2021, driven by robust back-to-school sales in the United States.

For third-quarter fiscal 2021, it anticipates net sales growth of 2-4% from the 2019 reported level of $863 million. It expects the United States to be the largest contributor to sales growth, outpacing the EMEA and APAC regions. However, the company expects the ongoing supply-chain disruptions, mostly related to cost inflation, to hurt sales modestly in the fiscal third quarter.

It expects the gross margin rate to increase 300 bps in the fiscal third quarter from 60.1% reported in third-quarter fiscal 2019. The gross margin for the quarter is likely to include a 300-400-bps impact of increased freight costs. The company remains cautiously optimistic about its ability to deliver AUR improvements through reduced promotions and clearance activity.

Operating expenses are expected to increase in low-single digits from adjusted operating expenses of $494 million reported in the comparative 2019 period. Operating expense growth is likely to be driven by higher fulfillment expenses, which will more than offset lower store expenses. The company also plans to incur increased marketing expenses from that reported in third-quarter fiscal 2019 to drive social and digital media momentum across brands. It expects gains from marketing investments to reap benefits throughout the second half of fiscal 2021 and fiscal 2022. It expects the fiscal third-quarter effective tax rate to be low-20%.

For fiscal 2021, Abercrombie envisions net sales growth in the low to mid-single digits, whereas it reported $3.6 billion in fiscal 2019. Gross margin is expected to expand 300 bps, whereas it reported 59.4% in fiscal 2019. Net operating expenses are estimated to decline 3-4% from the fiscal 2019 reported level of $2.07 billion. Based on the expectations, the company predicts operating margin at 9% for fiscal 2021, which significantly exceeds the company’s 2018 Investor Day target of 5.8%.

3 More Retail Stocks to Watch

Foot Locker, Inc. FL has a long-term earnings growth rate of 4%. It currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Children’s Place, Inc. PLCE, also a Zacks Rank #1 stock, has an expected long-term earnings growth rate of 8%.

Tapestry, Inc. TPR has a long-term earnings growth rate of 10% and a Zacks Rank #2 (Buy).


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