Abercrombie Beats Marginally - Analyst Blog

Casual apparel retailer, Abercrombie & Fitch Co. ( ANF ) reported adjusted earnings of 3 cents per share for the first quarter of 2012, marginally beating the Zacks Consensus Estimate of 2 cents per share. However, quarterly earnings for the quarter dipped substantially from the year-ago quarter earnings of 27 cents per share.


Abercrombie reported net sales growth of 10% in the reported quarter, reaching $921.2 million from $836.7 million in the prior-year quarter. However, Abercrombie's quarterly revenue missed the Zacks Consensus Estimate of $951 million.

Abercrombie's revenue increase for the quarter reflected a 1% rise in domestic net sales (including direct-to-consumer sales) and a robust 42% surge in international net sales (including direct-to-consumer sales).

Overall direct-to-consumer merchandise sales jumped 40% to $148.2 million in the reported quarter, reflecting continued strength. During the quarter, the company reported a 5% decrease in comparable store sales (comps), which incorporated comps decline of 4%, 11% and 5% at Abercrombie & Fitch, abercrombie kids and Hollister Co, respectively.

First Quarter Summary

In the fourth quarter, gross profit inched up 6% to $576.4 million while gross margin contracted 240 basis points to 62.6%. The contraction in gross margin was due to a substantial increase in the average unit cost.

Stores and distribution expenses, as a percentage of sales, rose 49.5% from 47.7% in the prior-year period on account of increased direct-to-consumer costs, store payroll and store management costs, partially offset by reduced occupancy cost percentage. Moreover, marketing, general and administrative expenses, as a percentage of sales, also contracted 20 basis points to 12.7%.

Operating income for the quarter declined substantially to $6.3 million from $38.7 million in the same quarter last year. This resulted in operating margins dipping to 0.7% from 4.6% in the prior-year period.

Balance Sheet

Abercrombie ended the first quarter of fiscal 2012 with cash and cash equivalents of $321.6 million, marketable securities of $37.9 million and shareholders' equity of $1,693.0 million. Long-term debt as of April 28, 2012 came in at $65.7 million.

During the quarter, Abercrombie bought back 3.3 million shares at a total cost of $161.2 million. Further, the board of directors added an authorization of 10 million shares to the existing share repurchase program. The company now has a total authorization of 12.9 million shares to be bought back under its share repurchase program.

Additionally, the board announced a quarterly cash dividend of 1.75 cents per share payable on June 12, 2012 to shareholders of record as of May 29, 2012.

Store Update

During the first quarter, the company opened one new Abercrombie & Fitch store and 7 Hollister stores in international locations. The company ended first quarter with a total of 1,049 stores, including 294 Abercrombie & Fitch stores, 159 abercrombie kids stores, 575 Hollister Co. stores and 21 Gilly Hicks stores. Following the quarter-end, the company put up four more Gilly Hicks stores internationally.

Sneak Peek into 2012

Looking ahead, Abercrombie retained its earnings per share guidance of $3.50 to $3.75 for fiscal 2012. The company expects lower sales expectations for fiscal 2012 to be offset in large part by a higher projected gross margin rate, lower expenses and a lower share count at the end of the first quarter. Further, the company now projects comps for fiscal 2012 to be down by a mid-single-digit percentage, mainly reflecting the first quarter trends.

The company expects to incur capital expenditure of nearly $400 million in fiscal 2012, primarily slated for new stores and investments in the distribution center and direct-to-consumer operations.

For 2012, the company is sticking to its plan of opening Abercrombie & Fitch stores in international locations including Hong Kong, Munich, Dublin and Amsterdam. Additionally, the company expects to open about 40 Hollister stores in international locations in fiscal 2012.

In Conclusion

Abercrombie operates in a highly fragmented market and competes with national as well as regional players. Competing with larger retailer like Gap Inc. ( GPS ), the company also competes with value-priced specialty retailers such as Aeropostale Inc. ( ARO ).

Abercrombie currently retains a short-term Zacks #3 Rank (Hold). Though cognizant of the rising retail market, we are also conscious of steep competition in this space and rising commodity prices. Therefore, we maintain a long-term Neutral recommendation on the stock.

ABERCROMBIE (ANF): Free Stock Analysis Report

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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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