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Why Is Abercrombie (ANF) Down 15.4% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Abercrombie & Fitch (ANF). Shares have lost about 15.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Abercrombie due for a breakout? 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 drivers.

Abercrombie Q1 Loss Wider Than Expected, Sales Fall Y/Y

Abercrombiereported weak first-quarter fiscal 2020 results, wherein the top and the bottom line declined year over year. Moving on, management witnessed material impact of COVID-19 in the reported quarter and anticipates a lingering effect. As a result, the company refrained from providing any guidance for the second quarter and fiscal 2020.

Q1 Highlights

Abercrombie reported adjusted loss of $3.29 per share in the fiscal first quarter compared with a loss of 29 cents in the year-ago quarter. The figure was also wider than the Zacks Consensus Estimate of a loss of $1.31.

Net sales totaled $485.4 million, which lagged the Zacks Consensus Estimate of $498.1 million and declined 34% from the year-ago quarter. On a constant-currency basis, the top line declined 33%.

Brand-wise, net sales declined 36% and 30% to $273 million and $212.3 million for the Hollister and Abercrombie brands, respectively. From a geographical viewpoint, net sales fell 31% in the United States and dropped 39% in international markets.

Margins

Gross margin contracted 610 basis points (bps) to 54.4% on additional costs related to reduction of inventory stemming from COVID-19 as well as lower promotions. This includes adverse currency impact of 30 bps. At constant currency, gross margin declined 580 bps.

Adjusted operating loss totaled $166.2 million compared with a loss of $27.3 million in the year-earlier quarter. This included adverse currency impact of 50 bps.

Other Financials

Abercrombie ended the quarter with cash and cash equivalents of $704 million and gross borrowings under its term-loan agreement of $233.3 million. Also, inventories were $426.6 million, reflecting a 1.3% decline from the prior-year period. In the quarter under review, capital expenditure was $47 million.

Moving on, management has suspended its share repurchase program and dividend payouts in wake of the COVID-19 outbreak. Prior to this, it returned roughly $28 million to shareholders in the forms of share repurchases and dividends. That said, the company boasts a liquidity of $763 million as of May 2, 2020, which will help it to stay afloat during this crisis.

Store Update

Since mid-March, the company temporarily closed stores outside the APAC region in the wake of the COVID-19 outbreak. However, it interacted with customers via social media, mobile apps, online events, websites and emails. Also, the distribution centers were operational to fulfill online demand. In this context, the company generated digital sales growth of nearly 25% which gained momentum in mid-March to April and continued in May. It has also started reopening some stores from May 27.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted 8.46% due to these changes.

VGM Scores

Currently, Abercrombie has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

Outlook

Abercrombie has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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