Abercrombie & Fitch Jumps Big On Earnings Beat And Apparent Revival Signs

Amid the persistent struggle of the U.S. apparel industry, Abercrombie & Fitch (NYSE:ANF) surprised many with its substantially better-than-expected performance in the third quarter of fiscal 2015. As the company’s operating profits doubled, its shares jumped 25% post the earnings release, which is among the biggest single day gain for an apparel company over the past couple of years. Though the retailer’s sales fell for the 11th quarter in a row, the decline has slowed significantly over the past couple of quarters. At this rate, Abercrombie is expected to return to positive growth soon. Although the company has projected flat comparable sales for the fourth quarter, with negative revenue change, much of that has been attributed to negative currency headwinds. ^[1] This is an indication that Abercrombie’s organic growth is in fact getting better.

During the third quarter, the retailer was able to improve its full price sales and bring customers back with its revamped merchandise mix and updated selling strategies. Abercrombie’s clothes are classier now than they were before, thanks to its strategy to transitioning merchandise portfolio across the broad. Also, its in-store environment is much more subtle now with changes in music, lighting and the way clothes are stacked.

Our price estimate for Abercrombie & Fitch stands at $ 28, implying a significant premium to the current market price.

See our complete analysis for Abercrombie & Fitch

Q3 Highlights

For the quarter, Abercrombie’s total revenues fell 3.6% to $878 million, which was some way ahead of the expected figure of $862 million. Comparable sales were down just 1%, while the analysts had predicted the metric to decline 2.4%. They fell 3% in the U.S. and just 1% internationally, and these figures were a long way ahead of expectations. With fewer promotions and controlled inventory, gross margins expanded 120 basis points to 63.4%, and store and distribution expenses fell from $413 million to $392 million. Operating profits totaled at $3.9 million (including insurance reimbursements) compared to the year ago figure of $1.5 million. Adjusted non-GAAP EPS came in at $0.48, a six cents increase year-over-year and more than double the expected figure of $0.22. ^[2]

Hollister Gets Positive

Abercrombie’s strongest brand, Hollister, which has been transitioned into a fast-fashion brand, returned to positive growth in Q3, recording 3% rise in comparable sales. The brand’s remodeled stores continued to perform well and average unit retail improved with a fall in promotional frequency. Hollister’s management mentioned in the earnings call that they are witnessing an across the board improvement on the back of changes in design, assortment and buying processes. Abercrombie has remodeled 13 Hollister stores so far and as this count increases in the future, the brand’s comparable sales growth can accelerate. ^[3] In fact, we may see higher than 3% growth in the brand’s comparable sales for the ongoing holiday quarter, given that overall comparable sales are not projected to decline.

A&F Recovery Is Slow

While Hollister is progressing well, Abercrombie’s mainline brand A&F still needs some work. Although the brand’s comparable sales decline has come down over the past few quarters, it is still not at a level with which the company should feel comfortable. During Q3, A&F’s comparable sales were down 5%, as the men’s business underperformed.  Management acknowledged that this area needs significant work. However, improvement in the women’s business, where much of the transition has happened over the last one year, should be reassuring. Overall, we believe that portfolio transition has triggered a revival in Abercrombie’s sales and the worst may be behind it.

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1. Abercrombie & Fitch Reports Third quarter Results, Abercrombie, Nov 20 2015 [↩]
2. Abercrombie & Fitch Sales decline slows as turnaround takes hold, Reuters, Nov 20 2015 [↩]
3. Abercrombie & Fitch’s Q3 fiscal 2015 earnings transcript, Nov 20 2015 [↩]