ANF Sales Dip, Reforms Gilly Hicks - Analyst Blog

By Zacks Equity Research,

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Abercrombie & Fitch Co. ( ANF ), a specialty retailer of casual apparel, reported disappointing preliminary sales results for third-quarter fiscal 2013. Net sales for the quarter skidded 12% to $1.033 billion, while it fell short of the Zacks Consensus Estimate of $1.074 billion.

Including sales from the direct-to-customer business, the company recorded a comparable store sales (comps) decline of 14% in the quarter. The plunge mainly resulted from a 14% downside in U.S. comps and a 15% decline in International comps. However, comps benefited from an 11% rise in direct-to-customer comps.

Further, the weak sales results for the quarter reflect continued weakness in the overall spending among youngsters.

Despite the soft preliminary sales results and lower-than-anticipated gross margin forecast, the company now anticipates adjusted earnings at the higher end of its previously formulated guidance of 40 - 45 cents per share. Adjusted earnings for the third quarter will exclude pre-tax charges of nearly $90 - $100 million related to the restructuring at the Gilly Hicks brand, non-cash impairment charges tied to other stores and costs associated with the company's profit enhancement initiatives.

However, the company did not provide the GAAP earnings guidance due to lack of clarity on the magnitude of the above mentioned charges.

The company is scheduled to release its third-quarter earnings results on Nov 21, 2013.

Going forward, the company takes a cautious stance looking into the fourth quarter due to lack of any growth catalysts, while anticipating closing the year with adequate fall carryover inventory.

For the full year, the company expects adjusted earnings in the $1.40-$1.50 per share range, based on a low double digit decrease in comparable sales for the fourth quarter. Further, the company anticipates significant decline in gross margin rate in the fourth quarter as the company clears excess inventory throughout the quarter. However, the company highlighted that its full-year guidance excludes charges related to the Gilly Hicks restructuring, store closures, other impairments, execution of the company's profit enhancement initiatives, as well as any share repurchases.

Further, the company believes that it is on track to record sustainable growth in sales, profitability and return on invested capital in light of its recently completed long-term strategic review. The company is expected to release the results of this review on Nov 6, 2013.

Restructuring Plans for Gilly Hicks

Simultaneous to the preliminary results and in correlation with the completion of its long-term strategic review, Abercrombie has decided to shut down all of its stand-alone Gilly Hicks stores and continue offering the brand's intimate apparel through its Hollister stores and direct-to-customer channels. The company expects to close all its Gilly Hicks stores by the end of first-quarter fiscal 2014.

In relation to the store closures, the company expects to incur about $90 million of pre-tax charges in the third and fourth quarters of fiscal 2013 and first-quarter fiscal 2014. These charges mainly comprise about $40 million of non-cash impairment charges and $50 million of lease-related, severance and other charges. Additionally, the company projects net cash outflows of about $55 million, before any related tax gains, related to the closures.

Further, excluding the above mentioned charges, the Gilly Hicks store operations are expected to result in pre-tax loss of nearly $30 million in fiscal 2013. However, following store closures and reductions in overhead expenses, the company projects the brand to operate near to break-even in fiscal 2014.

Amendment of Credit and Term Loan Agreements

In concurrence with the plans to close Gilly Hicks stores, the company has amended its existing credit and term loan agreements, facilitating the company to exclude a maximum of $60 million cash charges related to the Gilly Hicks restructuring from its calculation of minimum coverage and maximum leverage ratios. Moreover, the company's minimum coverage ratio requirement will be reduced for the time being up to second-quarter fiscal 2015. The amendments mentioned became effective from Nov 4, 2013.

Other Stocks to Consider

Currently, Abercrombie carries a Zacks Rank #5 (Strong Sell). Better performing stocks in the apparel retail industry include Fifth & Pacific Companies Inc. ( FNP ), Finish Line Inc. ( FINL ) and DSW Inc. ( DSW ). All of these carry a Zacks Rank #2 (Buy).

ABERCROMBIE (ANF): Free Stock Analysis Report

DSW INC CL-A (DSW): Free Stock Analysis Report

FINISH LINE-CLA (FINL): Free Stock Analysis Report

FIFTH PACIFIC (FNP): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: ANF , DSW , FINL , FNP

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