Abercrombie (ANF) Moving Out of the Woods: Time to Hold?

Apparel retailer Abercrombie & Fitch Co.ANF seems to be slowly emerging out of the woods as the stock is recovering and so are its top-line and bottom-line results. The stock which delivered a negative return of 32.3% in the past one year, has taken a U-turn and has returned 5.2% year to date. Further, this performance outperformed the Zacks categorized Retail - Apparel and Shoes industry's decline of 19.3%.

The credit for this improvement goes to the company's strategic capital investments, cost saving efforts, loyalty and marketing programs, which are gaining traction. Abercrombie remains focused on reviving brands, enhancing performance and returning to profitable growth. Consequently, the company has been implementing several steps to spur on its business forward. These initiatives include improving leadership team and organizational structure; optimizing store fleet by introducing stores in high-performing markets, while closing the underperforming ones along with remodeling stores and improving assortments to meet changing trends and demands. Further, it is developing omni-channel capacities and focusing on key merchandise and design processes.

Also, this Zacks Rank #3 (Hold) company keeps discounts low along with a check on promotional activities, in an attempt to enhance margins. We believe that the company is very much on track to bring a turnaround as management expects these efforts to revive its iconic brands, and drive notable and sustained growth.

These initiatives have brought forward meaningful results, as evident from the revival of the Hollister brand and solid direct-to-consumer (DTC) performance. While Hollister delivered 3% rise in comparable store sales (comps) in first-quarter fiscal 2017, the DTC business accounted for nearly 27% of sales in the quarter. The solid performance of these businesses in turn aided the company to post in-line earnings and sales beat in the fiscal first quarter.

Abercrombie & Fitch Company Price, Consensus and EPS Surprise

Abercrombie & Fitch Company Price, Consensus and EPS Surprise | Abercrombie & Fitch Company Quote

What are the Possible Deterrents?

However, both the top line and bottom line declined year over year. The fall in the top line primarily stemmed from a tough retail environment characterized by heightened promotional activity and soft comps. Further, adverse currency headwinds dented results. In the most recent quarter, adverse currency exchange rates hurt Abercrombie's sales by nearly $12 million (170 bps), operating income by $5 million and earnings by 5 cents per share.

Further, Abercrombie has a record of dismal earnings and sales trends, having reported negative earnings and sales surprises in four of the last five quarters. Evidently, the company delivered an average negative earnings surprise of 26.2% in the trailing four quarters.

Coming to the guidance, the company made no major changes in its previously stated guidance for fiscal 2017. While it expects comps to remain challenging during the fiscal second quarter, improvements are anticipated in the second half of the year. Moreover, foreign currency headwinds are likely to persist and hurt sales as well as operating income in fiscal 2017. Gross margin is expected to remain pressurized during the second quarter and fall slightly from last year's rate of 61% in fiscal 2017. These factors led to the widening of loss estimates in the last 30 days.

The Zacks Consensus Estimate for fiscal 2017 widened from a loss to 11 cents to a loss of 23 cents per share, while the estimate for fiscal 2018 moved from a loss of 2 cents to a loss of 9 cents per share. Further, the current Zacks Consensus Estimate of a loss of 34 cents per share for the fiscal second quarter reflects 34.9% decline from the prior-year quarter. Analysts polled by Zacks anticipate revenues of $758.3 million, down 3.2% from the year-ago quarter.

Bottom Line

Abercrombie's stock performance and recent financial results definitely point to a marked improvement in the company's historic trends. Further, the improvement in Hollister and DTC are encouraging. However, we cannot ignore the fact that the company is yet return to delivering profits and the outlook is slightly strained. Hence, we would suggest waiting for more pronounced improvement before making a buy or sell decision on the stock. So, holding on to the stock is a good idea at the moment.

Stocks to Consider

Better-ranked stocks in the retail sector include The Children's Place Inc. PLCE , Build-A-Bear Workshop Inc. BBW and Big 5 Sporting Goods Inc. BGFV . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Children's Place has an average positive earnings surprise of 36.6% in the trailing four quarters. The stock has a long-term growth rate of 8%.

Build-A-Bear Workshop has a long-term EPS growth rate of 22.5%. Further, the company has to its credit a spectacular earnings surprise history with an average beat of 67.5% recorded in the trailing four quarters.

Big 5 Sporting has an average positive earnings surprise of 94.5% in the trailing four quarters. The stock has a long-term growth rate of 12%.

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

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

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