ANF Abercrombie and Fitch Co

Abercrombie & Fitch Co. (ANF) registered earnings of 27 cents a share in the first quarter of fiscal 2011, thereby surpassing the Zacks Consensus Estimate of 11 cents a share and beating substantially the prior-year net loss of 13 cents per share.

Result Summary

Abercrombie reported double-digit net sales growth of 22% in the reported quarter, climbing to $836.7 million from $687.8 million in the prior-year period. Total revenue comprehensively beat the Zacks Consensus Estimate of $783.0 million.

The growth reflected a 13% increase in domestic net sales (including direct-to-consumer sales) to $641 million and a robust 64% surge in international net sales (including direct-to-consumer sales) to $195.7 million. Overall, comparable-store sales rose 10%.

Direct-to-consumer merchandise sales jumped 32% to $105.8 million in the reported quarter, reflecting continuing strength in this channel. Comparable-store sales at brands Abercrombie & Fitch and abercrombie kids rose a respective 8% and 11%. Hollister Co. also reported a comparable-store sales growth of 11.0% in the quarter.

Gross profit increased 26.0% to $543.7 million while gross margin expanded 230 basis points to 65.0%. The expansion in gross margin was led by a decrease in average unit cost along with positive currency impact, international mix and freight advantage.

Stores and distribution expenses, as a percentage of sales, declined to 47.7% from 51.5% in the prior-year period helped by a fall in store occupancy costs and payroll costs. Conversely, higher compensation and benefits resulted in an increase in marketing, general and administrative expenses, which climbed 11.0% to $107.7 million in the quarter under review.

Operating income for the quarter increased to $38.7 million from an operating loss of $18.7 million in the same quarter last year. Operating margin came in at 4.6% compared with -2.7% in the prior-year period.

Balance Sheet

Abercrombie ended the quarter with cash and cash equivalents of $741.8 million and shareholders’ equity of $1,908.6 million. Long-tem debt for the period came in at $69.9 million.

In the quarter under review, the company repurchased 0.4 million shares of its common stock at a price of $25.5 million. As of April 30, 2011, the company had approximately 9.3 million shares available for purchase under its publicly announced stock repurchase authorizations.     

Store Update

At the end of the quarter, the company operated 1,071 stores comprising 316 Abercrombie & Fitch stores, 181 abercrombie kids stores, 502 Hollister Co. stores and 18 Gilly Hicks stores in the U.S. Internationally, the company is operational with 9 Abercrombie & Fitch stores, 4 abercrombie kids stores, 40 Hollister Co. stores and 1 Gilly Hicks store.

Guidance

The company anticipates operating margin to remain under pressure in 2Q11 attributable to a reduction in expense leverage and a lower gross margin rate.

Brief Peek Into 2011

The company expects to incur capital expenditure of $350 million for fiscal 2011. A portion of the cash will most likely fund a slew of new-store openings. Moving forward, the company expects to open 40 international mall-based Hollister stores. The company also plans to close 50 domestic stores in fiscal 2011. The company is slated to open five international Abercrombie & Fitch flagship locations in fiscal 2011

In Conclusion

Abercrombie operates in a highly fragmented market and competes with national as well as regional players. The company besides competing with larger retailers like Gap Inc. (GPS) also has to contend with value-priced specialty retailers of the likes of 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. Hence, in the balance, we maintain a long-term Neutral recommendation on the company.

 
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