Hollister To Drive Improvement For Abercrombie & Fitch In The Third Quarter

Abercrombie & Fitch (NYSE:ANF) is set to release its third quarter results on November 17, wherein a marginal fall in revenues and a massive improvement in earnings is expected. In a surprising development, teen retailers did not do as badly as anticipated in the second quarter, when Abercrombie joined a list of retailers, including American Eagle, Urban Outfitters, Gap, and Express, who delivered a beat on both top and bottom line expectations. While the results may not have been great, and the expectations itself had been muted, it was a rare bit of positive news in a much-blighted sector. In Q2, the company reported a 0.5% decline in sales, and a 1% fall in its comparable sales growth, but an improvement in its earnings per share. Sequentially, the comps have improved by brand and by geography. Given this improvement, the back half of the year may result in positive comps growth. A&F estimates a growth in this metric to be approximately flat to up slightly in the second half. While the retail environment continues to remain challenging, the company has undertaken efforts to improve their product assortment, perk up their investments in marketing and omnichannel, and optimize productivity. All these steps bode well for a more upbeat second half.

We have a $12 price estimate for Abercrombie & Fitch, which is roughly in line with the current market price.

Hollister Expected To Deliver Again

Hollister has continued to perform strongly amid a tough retail environment. The brand built on the momentum it had gathered in the past few quarters, growing its comps by 5% and its sales by 6% in the second quarter. While A&F’s comps are improving sequentially, they are still in the negative territory. As can be seen in the chart below, the third quarter of FY 2016 seems to be the turning point for the comps. While Hollister’s recovery started in the quarter prior, for the namesake brand and the whole company, the comps have trended better since Q3 2016. Changes to the assortment have been a factor driving the growth at Hollister, as well as its lower-priced products as compared to A&F. Its Club Cali loyalty program continues to do well, and attract new customers. The program had grown to 6.6 million customers by the quarter-end, who get to make use of the member-only events.

DTC Segment To Continue Its Strong Performance

One avenue of long-term growth is the company’s online business. A fundamental shift from brick-and-mortar to the online platform is evident, and retail companies have to embrace this trend in order to be relevant. Keeping this in mind, ANF has integrated its abercrombie and kids websites, and optimized it for mobile, payment, and tracking. The full omnichannel offering had been rolled out in the US, Canada, and the UK, as of second quarter-end, with plans to roll-out internationally through the remainder of 2017. For the second quarter, the DTC segment accounted for 24% of the sales, up from 23% last year, with strong gains seen in mobile, which directed roughly two-thirds of the DTC traffic. ANF is also expending $20 million this year for the global roll-out of its omnichannel and CRM capabilities.

Gross Margins Under Focus

While the second quarter results did show signs of improvement, the company seems to be far from an actual turnaround. A closer look at the sales beat in Q2 shows that the revenues were spurred on by a highly promotional environment. While this excessive discounting resulted in higher than expected sales, it came at the cost of reduced gross margins, which declined by 180 basis points in the quarter. If ANF had not resorted to reducing its prices, it would have been certainly faced with a significant drop in its sales. Looking ahead, the company has stated that it will continue to remain promotional in the second half of the year as well. This implies that the margins will remain pressured for at least the next two quarters. However, given the steps undertaken by the company, with regards to an improvement in the assortment and a better balance in the inventory, along with a boost provided as a result of foreign currency tailwinds, the gross margin is expected to improve as the company moves through the back half of the year.

See our complete analysis for Abercrombie & Fitch

Have more questions about Abercrombie & Fitch? See the links below:

• Hollister Helps Abercrombie Beat Estimates
• Abercrombie & Fitch Looks To The East For Growth
• Part 2: Is There A Way Out Of The Rut For Brick And Mortar Stores
• Retailing Conundrum, Part 1: Is There A Way Out Of The Rut For Brick And Mortar Stores?

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