ANF Abercrombie and Fitch Co

Abercrombie & Fitch Co. (ANF) registered earnings of 35 cents a share in the second quarter of fiscal 2011, comfortably surpassing the Zacks Consensus Estimate of 29 cents a share and beating substantially the prior-year net income of 24 cents per share.

Result Summary

Abercrombie reported double-digit net sales growth of 23% in the reported quarter, climbing to $916.8 million from $745.8 million in the prior-year period. Total revenue comprehensively beat the Zacks Consensus Estimate of $909.0 million.

The growth reflected a 12% increase in domestic net sales (including direct-to-consumer sales) to $641 million and a robust 74% surge in international net sales (including direct-to-consumer sales) to $231.9 million. Overall, comparable-store sales rose 9%.

Direct-to-consumer merchandise sales jumped 28% to $102.1 million in the reported quarter, reflecting continuing strength in this channel. Comparable-store sales at brands Abercrombie & Fitch and abercrombie kids rose a respective 5% and 7%. Hollister Co. also reported a comparable-store sales growth of 12.0% in the quarter.

Gross profit increased 20.1% to $583.0 million while gross margin contracted 150 basis points to 63.6%. The contraction in gross margin was led by an increase in average unit cost partially offset by positive international mix and freight advantage.

Stores and distribution expenses, as a percentage of sales, declined to 46.4% from 48.9% 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 16.0% to $110.0 million in the quarter under review.

Operating income for the quarter increased to $47.2 million from $27.6 million in the same quarter last year. Operating margin came in at 5.1% compared with 3.7% in the prior-year period.

Balance Sheet

Abercrombie ended the quarter with cash and cash equivalents of $539.6 million and shareholders’ equity of $1,899.3 million. Long-term debt for the period came in at $26.3 million.

In the quarter under review, the company repurchased 0.9 million shares of its common stock at a price of $64.4 million. As of July 30, 2011, the company had approximately 8.4 million shares available for purchase under its publicly announced stock repurchase authorizations.    

Store Update

At the end of the quarter, the company operated 1,073 stores comprising 316 Abercrombie & Fitch stores, 179 abercrombie kids stores, 501 Hollister Co. stores and 18 Gilly Hicks stores in the U.S. Internationally, the company is operational with 10 Abercrombie & Fitch stores, 4 abercrombie kids stores, 44 Hollister Co. stores and 1 Gilly Hicks store.

Sneak Peek into 2011

The company anticipates operating margin to remain under pressure in 2H11 attributable to a reduction in expense leverage and a lower gross margin rate.

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 60 to 65 domestic stores in fiscal 2011 and open 2 domestic stores. 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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