Casual apparel retailer
Abercrombie & Fitch Co.
(
ANF
) reported an outstanding financial result for the third quarter
of fiscal 2012 with earnings rising over 52% year over year to 87
cents per share, handily beating the Zacks Consensus Estimate of
59 cents per share. The robust quarterly performance was
primarily driven by strong top-line growth along with improved
margins and lower effective tax rate.
Summary of the Quarter
Driven by robust sales performance in the international
market, total sales for the company went up by 9% to $1.170
billion from $1.076 billion in the comparable prior-year period.
Moreover, Abercrombie's quarterly revenue surpasses the Zacks
Consensus Estimate of $1.115 billion.
The increase in total sales reflects robust growth of 37% in
international business (including direct-to-consumer sales) to
$351.1 million, resulting from increased number of store counts.
However, total domestic sales (including direct-to-consumer
sales) were approximately flat at 818.6 million.
Overall, direct-to-consumer sales jumped 20% to $158.3 million
in the quarter under review, signifying continued strength in the
online business.
In the third quarter, gross profit increased 13.2% to $731.6
million while gross margin improved 240 basis points (bps) to
62.5%. The expansion in gross margin was primarily driven by
reduced average unit cost and better international mix which were
partially offset by unfavorable currency exchange rates and minor
fall in average retail price.
Stores and distribution expenses, as a percentage of sales,
improved 40 bps to 42.5% compared with 42.9% in the prior-year
period on account of lower pre-opening store costs. However,
marketing, general and administrative expenses escalated by $15.6
million to $123.4 million due to enhance marketing, travelling
and IT expenses.
As a result of higher sales coupled with reduced input and
operating expenses, operating income for the quarter increased
over 40% to $112.4 million from $79.9 million recorded in the
comparable quarter last year. Consequently, operating margin
expanded 220 bps to 9.6% from 7.4% in the prior-year period.
Balance Sheet
Abercrombie ended the third quarter of fiscal 2012 with cash
and cash equivalents of $349.7 million, marketable securities of
$19.9 million and shareholders' equity of $1.663 billion. Total
long-term debt as of October 27, 2012 came in at $488.9
million.
During the quarter, the company spends approximately $104.3
million towards repurchasing 3 million shares of its common
stock. The company now has total authorization to buyback 19.9
million additional shares under its share repurchase program.
Additionally, the board announced a quarterly cash dividend of
17.5 cents per share payable on December 11, 2012 to shareholders
of record as of November 26, 2012.
Store Update
During the third quarter, the company opened 1 Abercrombie
& Fitch store in Hong Kong and 9 Hollister stores in
international locations. Abercrombie also opened a combined
Abercrombie & Fitch and abercrombie kids store in Munich.
The company ended the third quarter with a total of 1,067
stores, including 295 Abercrombie & Fitch stores, 160
abercrombie kids stores, 587 Hollister Co. stores and 25 Gilly
Hicks stores.
Sneak Peek into Fiscal 2012
Based on strong sales trends, Abercrombie raised its earnings
guidance for fiscal 2012 to $2.85-$3.00 per share, from its
earlier guidance range of $2.50-$2.75. However, the company
guided towards a fall in the range of mid-single-digit in
comparable-store sales for the fourth quarter of fiscal 2012.
Our Recommendation
We believe that the company's continuous focus on expanding
global operations and improving cash flows while maintaining a
healthy balance sheet bode well for its future growth.
However, 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
Gap Inc.
(
GPS
), as well as from value-priced specialty retailers like
Aeropostale Inc.
(
ARO
) and
Buckle Inc.
(
BKE
).
Consequently, we maintain our long-term Neutral recommendation
on the stock, which correlates with our Zacks #3 Rank, implying
short-term Hold rating on the stock for the next 1-3 months.
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.
ABERCROMBIE (ANF): Free Stock Analysis Report
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