We retain our long-term Neutral recommendation on apparel chain
store operator,
Abercrombie & Fitch Company
(
ANF
). The company also retains a Zacks #3 Rank, which translates into
a short-term Hold rating.
Our balanced approach on Abercrombie mainly relates to its
aggressive move to close underperforming stores while expanding its
global operations, offset in part by the company's not so good
earnings results. Further, the company continues to improve cash
flows while maintaining a healthy balance sheet, which bodes well
for its future growth.
In the fourth quarter of 2011, the company registered a 16%
growth in the top-line but witnessed a fall of 18.8% in the
bottom-line, on account of contracting margins. However, the
company's reported sales and earnings per share were in line with
the Zacks Consensus Estimate. Sluggish average unit revenues (AURs)
and higher average unit costs (AUC) in the quarter exerted
considerable pressure on margins.
Nevertheless, the company's optimism on margins remain intact as
it expects poor sales and AUR trends for 2012 to be offset in large
part by the reversing of AUC trends in the later half of 2012.
Moreover, over the longer term, the company targets 15% growth in
sales and over 15% in earnings per share.
Additionally, the company has a very healthy and debt-free
balance sheet with cash and cash equivalents of $583.5 million at
the end of fiscal 2011. This offers Abercrombie the flexibility to
drive future growth.
Another positive driver for the company is its ongoing efforts
to expand international operations in the face of economic
challenges. The company is winding up its unprofitable U.S.
locations and accelerating growth at its Abercrombie Kids and
Hollister store concepts. Highlighting the company's growth plan is
to increase its presence in international markets as a means to
drive top-line growth.
During fiscal 2011, the company opened 47 new international
stores while it closed 71 stores in the U.S. In fiscal 2012,
Abercrombie plans to open five Abercrombie & Fitch stores in
flagship locations including Hamburg, Hong Kong, Munich, Dublin and
Amsterdam as well as an abercrombie kids store in London. The
Munich and Amsterdam locations will also house new abercrombie kids
store. Moreover, the company plans open about 40 international
Hollister stores in fiscal 2012.
On the flip side, the company's over-dependence on outside
suppliers, intense competition from discount retailers and
seasonality of business may undermine its future operating
performance.
Abercrombie operates in a highly fragmented market and competes
with national as well as regional players. Besides competing with
larger retailer like
Gap Inc.
(
GPS
), the company also competes with value-priced specialty retailers
such as
Aeropostale Inc.
(
ARO
).
Though cognizant of the rising retail market, we are also
conscious of the steep competition in this space along with rising
commodity prices.
ABERCROMBIE (
ANF
): Free Stock Analysis Report
AEROPOSTALE INC (
ARO
): Free Stock Analysis Report
GAP INC (
GPS
): Free Stock Analysis Report
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