Abercrombie & Fitch (ANF) Up 2.6% Since Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Abercrombie & Fitch Company ANF. Shares have added about 2.6% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is ANF due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Abercrombie Q1 Loss Narrower Than Expected, Sales Beat

Abercrombie & Fitch reported narrower-than-expected loss per share in first-quarter fiscal 2018, while top line beat estimate. Further, both loss per share and revenues improved compared with the prior-year quarter. Results in the quarter gained from strong performance across all brands, effective marketing and growing consumer confidence.

Q1 Synopsis

The company posted first-quarter adjusted loss of 56 per share, significantly narrower than the Zacks Consensus Estimate of a loss of 79 cents. Further, loss per share in the quarter improved from a loss of 91 cents per share reported in the prior-year quarter. Bottom line results gained from increase in comparable store sales (comps), gross margin growth and expense leverage. Further, currency tailwinds of roughly 3 cents per share, net of hedging, aided results.

Net sales of $730.9 million surpassed the Zacks Consensus Estimate of $696 million and grew 11% year over year. The upside was driven by comps growth of 5%, benefits of 1% from the additional week in fiscal 2017 and a positive currency impact of 4%.

Brand-wise, net sales improved 13% to $423.6 million at Hollister, while sales for the Abercrombie brand rose 7% to $307.3 million.  From a geographical viewpoint, net sales grew 10% and 12%, in the United States and international markets, respectively. Moreover, the company’s direct-to-consumer business continued to perform well, accounting for nearly 27% of the net sales and recording 14% increase in comp sales year over year.

The company remains encouraged by comps performance that benefited from the rise in traffic and conversion. On a segmental basis, comps for Hollister increased 6%, while Abercrombie reported 3% growth. Moreover, comps improved 8% in the United States and were flat in international markets.

The Hollister brand reflected persistent positive momentum driven by strong sales growth across all channels and geographies. Abercrombie showed further signs of improvement, delivering second consecutive quarter of positive comps backed by strength in North America due to improved traffic and conversion.

Gross profit margin expanded 20 basis points (bps) to 60.5%, owing to lower promotional activity. Gross profit margin remained flat on a constant currency basis.

Abercrombie reported adjusted operating loss of $36.6 million, substantially wider than adjusted operating loss of $69.9 million recorded in the prior-year period.

Financials

Abercrombie ended the quarter with cash and cash equivalents of $592 million and gross borrowings under its term loan agreement of $253.3 million. As of May 5, 2018, inventories were $405.1 million, up 2% from the prior-year period.

On May 22, the company declared a quarterly dividend of 20 cents per share on the Class A shares. This is payable Jun 18, to shareholders of record as of Jun 8.

Further, the company bought back 0.8 million shares for nearly $19 million in the fiscal first quarter. The company had about 5.7 million shares remaining to be purchased under its current authorization.

Store Update

In first-quarter fiscal 2018, the company introduced only one new Hollister store in the United States.

Management expects to introduce 22 full-price stores in fiscal 2018, including 13 Hollister and nine Abercrombie stores. Moreover, it plans to shut down up to 60 stores in the United States in fiscal 2018, through natural lease expirations.

Outlook

For fiscal 2018, the company now estimates both comps and sales to be up 2, compared with low-single digits gain predicted earlier. Top line gains from the favorable currency rates will be offset by the absence of the additional week of sales compared with fiscal 2017. Favorable foreign currency rate is expected to contribute nearly $50 million to sales, while the calendar shift will impact sales by $40 million.

The company reiterated gross margin projection of improving slightly from the 59.7% recorded in fiscal 2017. The upside will stem from higher average unit retail, including currency gains, offset partly by slightly higher average unit costs.

GAAP operating expense, including other operating income, is expected to increase nearly 2% from $2 billion adjusted operating expense recorded in fiscal 2017. Earlier, the company had projected a 1% increase.

Furthermore, the company expects effective tax rate to be in the mid-30s range, including nearly $9 million related to share-based compensation accounting standards awards, most which were accounted in the fiscal first quarter. Through the rest of fiscal 2018, the company expects effective tax rate in the mid-to-upper 20s. Further, it expects the impact from share-based compensation to not impact effective tax rate beyond 2018.

Additionally, the company expects liquidity to be strong in fiscal 2018. The company expects to exceed the minimum liquidity target of $700 million through 2018, as it accelerates potential investments. It envisions capital expenditures to be roughly $135-$140 million for fiscal 2018, above the prior guidance of $130 million. This will include $85 million for store updates and new stores and nearly $50-$55 million for direct-to-consumer and omni-channel investments, information technology and other projects.

For the second quarter, the company anticipates sales growth of high single digits, including about $10 million gain from foreign currency and $30 million from the calendar shift. Operating expenses are likely to increase mid-single digits from fiscal 2017 adjusted non-GAAP operating expense of $479 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter compared to one lower.

Abercrombie & Fitch Company Price and Consensus

 

Abercrombie & Fitch Company Price and Consensus | Abercrombie & Fitch Company Quote

VGM Scores

Currently, ANF has a nice Growth Score of B. Its Momentum is doing a bit better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for growth and to a lesser degree value.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Interestingly, ANF has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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