Abercrombie & Fitch Co.
), 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.
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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
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
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
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
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.
Finish Line Inc.
). All of these carry a Zacks Rank #2 (Buy).