Abercrombie & Fitch Slashes Outlook In Anticipation Of A Weak Holiday Season

Abercrombie & Fitch (NYSE:ANF) has reported its Q3 sales and earnings inline with those projections provided an update on its earnings last month. The retailer’s comparable store sales fell by 10% and its non-GAAP net income per diluted share came in at $0.42, a penny ahead of the market estimates. We note that Abercrombie’s last month update was followed by a significant decline in its stock price, which indicated that its performance was below investors’ expectations. Hence, a marginal earnings beat isn’t at all intriguing. In fact, the bigger news is the retailer’s full year guidance, which will definitely raise some concerns among investors. Abercrombie has revised its full year EPS guidance sharply downward to $1.52-$1.65 from its earlier outlook of $2.15-$2.35. This is alarming considering that the amount by which the company has lowered its EPS outlook is actually more than what it earns in a single quarter.

Our price estimate for Abercrombie & Fitch stands at $39, which is about 35% above the current market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Abercrombie & Fitch

Abercrombie expects its holiday quarter comparable store sales to decline in mid- to high-single digits on account of continued online shift, weak demand and heavy promotions. The National Retail Federation expects retail sales during the holiday season to increase by 4.1%, but most of that growth is expected to come from the online channel, where Abercrombie isn’t an established player. ^[1] Moreover, the reduced component of its logo business will also contribute to the retailer’s revenue decline. Earlier this year, Abercrombie decided to reduce the proportion of basic logo products in its portfolio to “almost nothing” in just 12 months. Several months have passed since the announcement and we believe that the company has made significant progress towards this goal. In fact, in the recently concluded quarter, Abercrombie stated that its reduced logo business was responsible for 12% decline in comparable sales, partially offset by 2% increase in the non-logo business. While gradually phasing out the logo business and focusing solely on non-logo products makes sense from the long term perspective, this strategy will continue to weigh on Abercrombie’s results in the near future, including the holiday season.

In the wake of the ongoing customer shift to the online channel, Abercrombie has been aggressive in the deployment of its omni-channel strategies. The company’s “ship from store” service in now available in 370 U.S. stores and “order in store” service has gone live in 670 stores. The retailer is even exploring omni-channel possibilities in Europe, realizing that e-commerce is indeed the future of retailing all around the globe. Having a single view of inventory across channels will provide customers a bigger variety of products from which to choose. Initiatives such as the ones mentioned above will encourage them to shop across all the channels, which can help the company offer the best through each medium. As an independent channel, e-commerce cannot grow beyond a certain point. Similarly, physical stores will fail to entice customers if they do not have any co-relation with the web channel. An effective integration of the two will allow retailers such as Abercrombie to attract customers irrespective of their preferred shopping medium.

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1. Optimism Shines As National Retail Federation Forecasts Holiday Sales To Increase 4.1%, National Retail Federation, Oct 7 2014 [↩]