ANF Abercrombie and Fitch Co

Battered by higher commodities costs, Abercrombie & Fitch Co.’s (ANF) third-quarter 2011 earnings of 57 cents per share was substantially below the Zacks Consensus Estimate of 73 cents. However, quarterly earnings were higher than the prior-period earnings of 56 cents per share.

Result Summary

Abercrombie reported double-digit net sales growth of 21.0% in the reported quarter, climbing $1,075.9 million from $885.8 million in the prior-year period. Moreover, total revenue comprehensively beat the Zacks Consensus Estimate of $1,069.0 million.

The growth reflected a 14.0% increase in domestic net sales (including direct-to-consumer sales) to $820.2 million and a robust 56.0% surge in international net sales (including direct-to-consumer sales) to $255.7 million. Direct-to-consumer merchandise sales jumped 41.0% to $132.4 million in the reported quarter, reflecting continuing strength.

Overall, comparable-store sales, during the quarter, grew 7.0%. Comparable-store sales at brands Abercrombie & Fitch and abercrombie kids rose a respective 4.0% and 6.0%, respectively. Hollister Co. also reported a comparable-store sales growth of 8.0% in the quarter.

Gross profit increased 14.5% to $646.5 million while gross margin contracted 360 basis points to 60.1%. The contraction in gross margin was due to an increase in the average unit cost.

Stores and distribution expenses, as a percentage of sales, declined to 42.9% from 43.5% in the prior-year period resulting from a fall in store occupancy costs. Moreover, marketing, general and administrative expenses, as a percentage of sales, also declined to 10.0% compared with 11.6% in the prior-year period, indicating the company’s efficiency in cost management.

Operating income for the quarter increased to $79.9 million from $78.4 million in the same quarter last year. Conversely, operating margin declined to 7.4% from 8.8% in the prior-year period.

Balance Sheet

Abercrombie ended the quarter with cash and cash equivalents of $488.3 million and shareholders’ equity of $1,931.2 million. Long-term debt for the period came in at $26.3 million.

In the quarter under review, the company repurchased 0.15 million shares of its common stock at a price of $8.8 million. As of October 29, 2011, the company had approximately 8.2 million shares available for purchase under its publicly announced stock repurchase authorizations.

Store Update

At the end of the quarter, the company operated 1,092 stores including 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, 63 Hollister Co. stores and 1 Gilly Hicks store.

Sneak Peek into 2011

The company continues to expect to incur capital expenditure of $350 million for fiscal 2011. Moving forward, the company expects to open 40 international mall-based Hollister stores. The company further plans to close 55 to 60 domestic stores in fiscal 2011 and open 2 domestic stores.

In Conclusion

Abercrombie operates in a highly fragmented market and competes with national as well as regional players. Besides, competing with larger retailer like Gap Inc. (GPS), the company also competes with value-priced specialty retailer such as 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 and rising commodity prices. Hence, in the balance, we maintain a long-term Neutral recommendation on the company.

 
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