ANF Abercrombie and Fitch Co

Abercrombie & Fitch Co.’s (ANF) adjusted earnings of $1.12 per share for the fourth quarter hit the bull’s eye, coming in line with the Zacks Consensus Estimate. However, quarterly earnings for the quarter were down 18.8% from the year-ago quarter earnings of $1.38 per share.

For full-year 2011, the company’s adjusted earnings came in at $2.31 per share, missing the Zacks Consensus Estimate of $2.33 per share, but sweeping past the year-ago period earnings of $2.05 per share.

Revenue

Abercrombie reported double-digit net sales growth of 16% in the reported quarter, reaching $1,328.8 million from $1,149.4 million in the prior-year quarter. Moreover, Abercrombie’s quarterly revenue meets the Zacks Consensus Estimate of $1,329.0 million.

Abercrombie’s fourth quarter revenue increase reflected a 4% rise in domestic net sales (including direct-to-consumer sales) and a robust 62% surge in international net sales (including direct-to-consumer sales).

Overall direct-to-consumer merchandise sales jumped 41% to $212.3 million in the reported quarter, reflecting continuing strength. During the quarter, the company reported flat comparable store sales (comps) versus the comparable quarter of last year, which incorporated a 2% comps increase at the Hollister Co. brand, offset by 4% comps decline at Abercrombie & Fitch and a 3% comps decline at abercrombie kids.

Full year revenue at Abercrombie was $4,158.1 million, up 20% year over year, marginally missing the Zacks Consensus Estimate of $4,159 million. The year-over-year increase was characterized by a 10% increase in domestic sales (including direct-to-consumer sales) and a whopping 63% spike in international sales (including direct-to-consumer sales). The company’s net direct-to-customer sales for the year witnessed an increase of 36% to $552.6 million.

Comparable store sales for the year registered a 5% increase compared with last year. This, by brand, reflected a 3% comps increase at Abercrombie & Fitch, a 4% surge at abercrombie kids and an 8% rise at Hollister Co. 

Fourth Quarter Results Summary

In the fourth quarter, gross profit inched up 2% to $745.6 million while gross margin contracted 750 basis points to 56.1%. The contraction in gross margin was due to an increase in the average unit cost as well as lower-than-expected sales and higher markdowns due to an aggressive promotional environment.

Stores and distribution expenses, as a percentage of sales, declined to 45.3% from 42.2% in the prior-year period. Moreover, marketing, general and administrative expenses, as a percentage of sales, also declined to 8.4% compared with 9.3% in the prior-year period.

Operating income for the quarter declined substantially to $24.3 million from $144.7 million in the same quarter last year. This resulted in operating margins dipping to 1.8% from 12.6% in the prior-year period.

Balance Sheet

Abercrombie ended fiscal 2011 with cash and cash equivalents of $583.5 million and shareholders’ equity of $1,862.5 million. Long-term debt for the year came in at $57.8 million. During fiscal 2011, the company spent $316.6 million in capital expenditures, consisting of $256 million for new stores, store refreshes and remodels, and $60 million for information technology, distribution center and other home office projects.

During the fourth quarter, Abercrombie bought back 2.017 million of its shares at a total cost of $97.9 million. This brought the company’s full year share buy backs to about 3.5 million for an aggregate cost of $196.6 million. As of January 28, 2012, the company had nearly 6.2 million shares left under its publicly announced stock repurchase authorizations.

Store Update

During fiscal 2011, the company opened 47 new international stores while it closed 71 stores in the U.S.  The company ended fiscal 2011 operating a total of 1,045 stores, including 294 Abercrombie & Fitch stores, 159 abercrombie kids stores, 571 Hollister Co. stores and 21 Gilly Hicks stores.

Sneak Peek into 2011

Going forward, Abercrombie expects earnings per share for fiscal 2012 to come in the range of $3.50 to $3.75. The company expects to incur capital expenditure of nearly $400 million in fiscal 2012, primarily slated for new stores and investments in the distribution center and direct-to-consumer operations.

In 2012, the company plans to open five Abercrombie & Fitch stores in flagship locations including Hamburg, Hong Kong, Munich, Dublin and Amsterdam as well as an abercrombie kids store in London.  Additionally, the company plans to add new abercrombie kids store in its Munich and Amsterdam locations.  Planned store closures for fiscal 2012 include 40 international Hollister 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. Therefore, we maintain a long-term Neutral recommendation on the stock.

 
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