Abercrombie & Fitch Company (ANF)

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Abercrombie & Fitch (ANF)

Q3 2012 Earnings Call

November 14, 2012 8:30 am ET

Executives

Brian P. Logan - Vice President of Finance and Controller

Michael S. Jeffries - Chairman, Chief Executive Officer and Member of Executive Committee

Jonathan E. Ramsden - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Barbara Wyckoff - Credit Agricole Securities (USA) Inc., Research Division

Janet Kloppenburg

Marni Shapiro - The Retail Tracker

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Jennifer Black - Black & Company Inc., Research Division

Jeff Black - Avondale Partners, LLC, Research Division

Randal J. Konik - Jefferies & Company, Inc., Research Division

John D. Morris - BMO Capital Markets U.S.

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

Dorothy S. Lakner - Caris & Company, Inc., Research Division

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Betty Y. Chen - Wedbush Securities Inc., Research Division

Oliver Chen - Citigroup Inc, Research Division

Eric M. Beder - Brean Murray, Carret & Co., LLC, Research Division

Erika K. Maschmeyer - Robert W. Baird & Co. Incorporated, Research Division

Omar Saad - ISI Group Inc., Research Division

Presentation

Operator

Good day, and welcome to the Abercrombie & Fitch Third Quarter 2012 Earnings Results Conference Call. Today's conference is being recorded. [Operator Instructions]

At this time, I would like to turn the conference over to Brian Logan. Mr. Logan, please go ahead.

Brian P. Logan

Good morning, and welcome to our third quarter earnings call. Earlier today, we released our third quarter sales and earnings, income statement, balance sheet, store opening and closing summary and updated financial history. Please feel free to reference these materials available on our website.

Also available on our website is an investor presentation, which we will be referring to in our comments during this call. This call is being recorded, and replay may be accessed through the Internet at abercrombie.com under the Investors section.

Before we begin, I remind you that any forward-looking statements we may make today are subject to the Safe Harbor statement found in our SEC filings. Today's earnings call is scheduled for 1 hour.

Joining me today on the call are Mike Jeffries and Jonathan Ramsden. We will begin the call with a few remarks from Mike, followed by a review of the financial performance for the quarter from Jonathan and me. After our prepared comments, we will be available to take your questions for as long as time permits.

And now to Mike.

Michael S. Jeffries

Good morning, everyone. The third quarter results we are reporting today include total sales up 9% and diluted earnings per share up 53% versus a year ago. Our operating margin for the quarter increased to 9.6% from 7.4% a year ago. These significantly improved financial results reflect progress on several fronts over the past quarter.

Starting with sales. We saw a sequential trend improvement in same-store sales in both the U.S. and international businesses. U.S. same-store sales increased 2%, with chain stores up 6% and flagship and tourist stores down 12%. Looking at our U.S. chain stores plus U.S. direct-to-consumer, comparable sales were up 7%, on top of growth of 16% in the comparable period last year. As reflected in the chart in our Investor Presentation, this means we have -- now have had positive growth on this key metric for each of the past 11 quarters.

Our overall international business grew 37% for the quarter, and we saw sequential comparable store sales improvement in all markets other than the U.K., where comps were similar to the second quarter. Elsewhere in Europe, bright spots included positive comps in Scandinavia and flat comps in Belgium and Spain. We are encouraged by our trend in Asia, where our first Hong Kong Hollister store has been comping positively since it lapped the initial opening period. In addition, we expect to comp positively in China when the first 3 stores move into the comp phase. And we have opened well in our first store in South Korea.

International direct-to-consumer sales grew strongly, up 31% versus a year ago, with Europe particularly strong. New stores opened during the quarter have performed well.

Coming back to the U.K., our comp trends there have remained challenged, down high 20s for the quarter, consistent with the second quarter. However, after adjusting for cannibalization, and including direct-to-consumer growth, we believe our underlying comparable sales trend was closer to being down by a mid-teen percentage. In addition, our full price selling mix in our U.K. Hollister stores was better than a year ago.

We believe the sales trend improvement we saw in the quarter is attributable to our inventory flow getting back on track after the issues we talked about in the second quarter. In addition, we have seen some benefit as we have begun to lap the macro-driven declines in our European business a year ago.

Turning to merchandise margin, we saw improvement across all segments of our business, reflecting a significant tailwind from lower product cost. Overall, we are pleased with these improved results, but with the critical fourth quarter still largely ahead of us and significant macroeconomic uncertainties remaining, we continue to be cautious in our near-term outlook. But trust me, we are upbeat, engaged and highly motivated.

In that context, we are continuing to focus on the strategic initiatives we spoke to on our last earnings call and I would like to take a few minutes to speak to each of those. First with regard to merchandising, we are being highly disciplined with regard to our strategy of starting with conservative merchandising plans, shortening lead times and increasing the percentage of our open-to-buy, reserved or chase current trends. In addition, we have heightened our focus on current street and runway trends.

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