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Abercrombie Updates 2Q Performance

Zacks Equity Research

Abercrombie & Fitch Co. (ANF) recently updated its preliminary results for the second quarter 2012. Driven by robust sales performance in international market, total sales for the company went up by 4% to $951.4 million from $916.8 million in the comparable prior-year period.

The increase in total sales reflected robust growth of 31% in international business (including direct-to-consumer sales) to $303.4 million, partially offset by a decline of 5% in domestic sales (including direct-to-consumer sales) to $648.0 million.

Overall, direct-to-consumer sales jumped 25% to 127.7 million in the quarter under review, signifying continued strength in online business. During the quarter, comparable store sales fell 10% compared with the year-ago period, reflecting a decline of 5% and 26% in domestic stores and international stores, respectively.

Abercrombie now anticipates a contraction of 100 basis points in gross margin during the second quarter of fiscal 2012 compared with the prior-year quarter. For the to-be-reported quarter, the company expects earnings per share in the range of 15 cents–18 cents. Moreover, inventory at cost is expected to increase by 20%, implying shoddier sales trend.

Further, based on weak sales trend along with strong domestic currency and increased tax rate, Abercrombie trimmed its earnings guidance for full-year 2012 to $2.50–$2.75 per share, from its earlier guidance range of $3.50–$3.75.

In addition, the company guided towards a fall of 10% in comparable-store sales for the second half of fiscal 2012. However, it expects significant recovery in its gross margin contraction rate in fiscal 2012, compared with fiscal 2011.

Due to macro-economic headwinds, Abercrombie is likely to revise its strategic plans for the fiscal 2012. Management is aiming to open about 30 Hollister stores in international locations in fiscal 2012, much less than their earlier target of 40 stores.

Further, the company intends to hold its store openings commitments in domestic as well as international markets. Abercrombie has trimmed down its capital expenditure by $0.60 million to $360 million.

Abercrombie is slated to release its second-quarter financial results on Wednesday, August 15, 2012. The company will provide additional details on the second-quarter 2012 in its conference call.

Our Take

Abercrombie is one of the leading specialty retailers of premium casual apparels in the U.S. The company 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 shifted its focus toward closing down its underperforming U.S. chain stores and speeding up growth at its Abercrombie Kids and Hollister store concepts. Moreover, the company is concentrating on increasing its presence in international markets as a means to drive top-line growth.

Abercrombie operates in a highly fragmented market and competes with national as well as regional players, which may take a toll on its performance. 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).

Based on lower guidance for the fiscal 2012, Abercrombie carries a Zacks #4 Rank, implying a short-term Sell rating for the next 1-3 months. However, we maintain our long-term Neutral recommendation on the stock.

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