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Here's Why Abercrombie (ANF) Outperforms Its Industry YTD

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Abercrombie & Fitch Co. ANF is one stock that has been resilient in recent months despite the uncertainties in the markets. Shares of this retailer of premium, high-quality casual apparel have been reaping the benefits of its robust digital sales momentum coupled with gross margin expansion and tight expense management. Growth across the United States, which is the company’s largest market, has been a key driver.

Abercrombie has been witnessing robust earnings surprise trend, which continued in second-quarter fiscal 2021. The company’s earnings beat the Zacks Consensus Estimate for the fifth straight quarter in second-quarter fiscal 2021. Its earnings and sales also improved year over year, aided by strong consumer demand trends.

Consequently, shares of the Zacks Rank #1 (Strong Buy) company have gained 85.2% year to date compared with the industry’s growth of 1.3%. Abercrombie has also comfortably outpaced the Retail-Wholesale sector’s decline of 6.8% and the S&P 500 index’s gain of 17.2% during the same period.

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Zacks Investment Research

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In the past 30 days, the company’s estimates for fiscal 2021 and 2022 earnings per share have moved up 28.3% and 23.4%, respectively. For fiscal 2021, its earnings estimates are pegged at $4.40 per share, suggesting significant growth from a loss of 73 cents reported in the prior-year quarter.

Now let us discuss at length the factors that have been aiding the clothing retailer’s growth.

Abercrombie has been benefiting from a strong omni-channel presence so far this year. The company’s strong presence has helped boost results on strong consumer spending trends so far this year. It is making significant progress in expanding the digital and omni-channel capabilities to better engage with consumers. Digital sales contributed about 44% to total sales in second-quarter fiscal 2021. The digital business mainly benefits from the addition of customers in the channel, backed by robust digital marketing efforts.

The company remains encouraged with its strong online presence and expects to keep gaining from the platform. It plans to continue investing toward bolstering omni-channel capabilities, including curbside and ship-from-store services. It is also striving to optimize the capacity at its distribution centers to meet increased digital demand. For fiscal 2021, the company expects a 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.

The company is working to rationalize its store base by reducing the dependence on underperforming tourist-driven locations. As part of its store-optimization plans, Abercrombie plans to reposition larger format flagship locations to smaller omni-channel enabled stores. Consequently, the company permanently closed 137 locations, representing 1.1 million productive gross square feet of its store base in fiscal 2020.

Abercrombie’s second-quarter fiscal 2021 top line also benefited from the reopening of stores across all regions, except for EMEA, where restrictions continue. As of Aug 26, 2021, all of the company’s stores were operational. It witnessed improvement in store performance, with global store sales improving 55% year over year in the fiscal second quarter. The company witnessed year-over-year growth despite permanent store closures as well as ongoing restrictions in EMEA.

Abercrombie 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.

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 company remains cautiously optimistic about its ability to deliver AUR improvements through reduced promotions and clearance activity.

For fiscal 2021, Abercrombie envisions net sales growth in the low to mid-single digits, whereas it reported $3.6 billion in fiscal 2019. The 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 the operating margin at 9% for fiscal 2021, which significantly exceeds the company’s 2018 Investor Day target of 5.8%.

Other Stocks to Consider

Tillys, Inc. TLYS has a long-term earnings growth rate of 10%. 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, with a Zacks Rank #1 at present, has a long-term earnings growth rate of 8%.

Tapestry, Inc. TPR, also a Zacks Rank #1 stock, has a long-term earnings growth rate of 11.7%.

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Abercrombie & Fitch Company (ANF) : Free Stock Analysis Report

The Childrens Place, Inc. (PLCE) : Free Stock Analysis Report

Tillys, Inc. (TLYS) : Free Stock Analysis Report

Tapestry, Inc. (TPR) : Free Stock Analysis Report

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