Casual apparel retailer
Abercrombie & Fitch Co.
) reported earnings of 19 cents per share for the second quarter of
fiscal 2012, beating the Zacks Consensus Estimate of 17 cents per
However, the quarterly earnings dipped substantially from the
year-ago earnings of 35 cents per share due to higher average unit
costs along with increased operating expenses and a higher tax
Driven by robust sales performance in the 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. However,
Abercrombie's quarterly revenue missed the Zacks Consensus Estimate
of $955 million.
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 the
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,
Summary of the Quarter
In the second quarter, gross profit inched up 1.9% to $594.4
million while gross margin contracted 110 basis points to 62.5%.
The contraction in gross margin was due to a substantial rise in
the average unit cost and unfavorable currency exchange rates.
Stores and distribution expenses, as a percentage of sales, grew
to 48.1% from 46.4% in the prior-year period on account of negative
comparable-store sales. Moreover, marketing, general and
administrative expenses escalated by $1.3 million to $113.3 million
due to enhanced marketing, travelling and IT expenses.
Operating income for the quarter declined substantially to $26.9
million from $47.2 million recorded in the comparable quarter last
year. This resulted in operating margins dipping from 5.1% in the
prior-year period to 2.8%.
Abercrombie ended the second quarter of fiscal 2012 with cash
and cash equivalents of $312.2 million, marketable securities of
$20.1 million and shareholders' equity of $1,695.8 million.
Long-term debt as of July 28, 2012 came in at $62.8 million.
During the quarter, the company did not repurchase shares of its
common stock. Further, the Board of Directors added an
authorization of 10 million shares to the existing share repurchase
program. The company now has total authorization to buyback 22.9
million additional shares under its share repurchase program.
Additionally, the board announced a quarterly cash dividend of
1.75 cents per share payable on September 11, 2012 to shareholders
of record as of August 27, 2012.
During the second quarter, the company opened 7 Hollister and 3
Gilly Hicks stores in international locations. Abercrombie also
opened a combined Hollister Gilly Hicks store in London.
The company ended the second quarter with a total of 1,055
stores, including 293 Abercrombie & Fitch stores, 159
abercrombie kids stores, 578 Hollister Co. stores and 25 Gilly
Hicks stores. Following the quarter-end, the company has put up one
more Abercrombie & Fitch store in Hong Kong.
Sneak Peek into Fiscal 2012
Based on weak sales trends along with strong domestic currency
and increased tax rates, Abercrombie has trimmed its earnings
guidance for fiscal 2012 to $2.50-$2.75 per share, from its earlier
guidance range of $3.50-$3.75. Currently the Zacks Consensus
Estimate stands at $2.54 per share.
In addition, the company guided towards a fall of 10% in
comparable-store sales for the second half of fiscal 2012. However,
it expects a significant recovery in its gross margin contraction
rate in fiscal 2012 compared with fiscal 2011.
Due to macro-economic headwinds, Abercrombie revised its
strategic plans for the fiscal 2012. Management is aiming to open
about 30 Hollister stores in international locations in fiscal
2012, many fewer 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 slashed its fiscal 2012 capital expenditure by $40
million to $360 million.
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
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 accelerating
growth at its Abercrombie Kids and Hollister store concepts.
Moreover, the company is concentrating on increasing its presence
in international markets in order to drive the 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, Abercrombie is facing increasing
competition from larger retailers, such as
), as well as from value-priced specialty retailers like
Based on lower guidance for the fiscal 2012, Abercrombie carries
a Zacks #5 Rank, implying a short-term Strong Sell rating for the
next 1-3 months. However, we maintain our long-term Neutral
recommendation on the stock.
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