Casual apparel retailer, Abercrombie & Fitch Co. (ANF), posted robust fourth-quarter and fiscal 2013 results. Earnings per share of $1.34 for the quarter and $1.91 for the fiscal year were substantially higher than the Zacks Consensus Estimate of $1.04 and $1.61, respectively. Better-than-expected results were primarily due to a lower tax rate that gained due to a major chunk of earnings coming from across national borders as well as higher expense savings stemming from the ongoing profit improvement initiative.
Including one-time charges related to the restructuring plans for Gilly Hicks, other impairment charges and implementation of the ongoing profit improvement initiative, the company reported earnings per share of 85 cents in the fourth quarter compared with $1.95 in the prior-year quarter. Full-year reported earnings came in at 69 cents per share against $2.85 reported in fiscal 2012.
Sales and Comps
Abercrombie’s net sales for the quarter dipped 12% to $1,299.1 million from $1,468.5 million in the year-ago quarter, primarily due to weak performances in the both domestic and international markets. Moreover, the quarterly revenue missed the Zacks Consensus Estimate of $1,343.0 million.
The decrease in sales reflects a decline of 13% in total domestic sales (including direct-to-consumer sales) to $852 million and a 9% decline in international business (including direct-to-consumer sales) to $447 million. Additionally, the weak sales results for the quarter reflect continued weakness in the overall spending among youngsters. However, direct-to-consumer sales increased 18% year over year to $315 million.
Including direct-to-consumer sales, the company’s total comparable-store sales (comps) decreased 8%. The plunge in comps mainly resulted from an 8% downside in U.S. comps and a 9% decline in International comps. However, comps benefited from a 24% rise in direct-to-customer comps.
Brand-wise, Abercrombie’s comparable sales including direct-to-consumer sales at its Abercrombie & Fitch, abercrombie kids and Hollister stores declined 6%, 8% and 10%, respectively. The company’s Abercrombie & Fitch, abercrombie kids and Hollister brands generated revenues of $477.9 million, $107.9 million and $684.1 million, respectively.
Net sales for fiscal 2013 rose approximately 9% to $4,116.9 million driven by a 14% decline in domestic sales, marginally offset by a 2% rise in international sales. However, the company’s top line missed the Zacks Consensus Estimate of $4,162 million.
Quarter in Detail
In the fourth quarter, gross margin contracted 440 basis points (bps) to 59.0% primarily driven by increase in promotions, including shipping promotions in the direct-to-consumer business.
Stores and distribution expenses, as a percentage of sales, remained almost flat at 38.9% compared with the prior-year period, primarily due to lower in store payroll, store management and support, and other stores and distribution costs that were compensated by impact from comps decline and higher direct-to-customer expenses.
Moreover, marketing, general and administrative expenses declined nearly 3% to $118.6 million driven by a fall in compensation expenses offset by higher marketing costs. Marketing, general and administrative expenses included about $3.2 million charges related to the ongoing profit enhancement initiative.
Financials
Abercrombie ended the quarter with cash and cash equivalents of $600.1 million, borrowings under the Term Loan Agreement of $135.0 million and shareholders’ equity of $1,729.5 million. As of Feb 1, 2014, inventories were approximately $530.2 million, up 24% from the prior year.
During fiscal 2013, the company spent nearly $164 million towards capital expenditures, comprising $101 million for new stores, store refreshes and remodels, and $63 million for information technology, distribution center and other home office projects.
Further, the company continued to enhance shareholder value by buying back about 2.4 million shares valued at $115.8 million. Available shares for repurchase under the company’s authorization were approximately 16.3 million as of Feb 1, 2014. Moreover, the company authorized an additional $150 million for repurchase in the first quarter of fiscal 2014.
The company’s board of directors also announced a quarterly cash dividend of 20 cents per share payable on Mar 18, 2014 to shareholders of record as of Mar 6, 2014.
Store Update
During fiscal 2013, the company opened 20 international Hollister chain stores, a flagship Abercrombie & Fitch store in Seoul and 4 multi-brand outlet stores. The Hollister stores opened during the year included the company’s first stores in Japan, the Middle East and Australia. The company’s multi-brand outlet stores included 3 stores in Europe and 1 in the U.S. Moreover, the company shuttered nearly 62 outlets in the U.S. during the fiscal year, comprising about 16 Gilly Hicks Stores.
The company ended fiscal 2013 with a total of 1,006 stores, including 275 Abercrombie & Fitch stores, 136 abercrombie kids stores, 587 Hollister Co. stores and 8 Gilly Hicks stores.
Restructuring Plans for Gilly Hicks
On Nov 1, 2013, Abercrombie decided to shut down all its stand-alone Gilly Hicks stores and continue offering the brand’s intimate apparel through its Hollister stores and direct-to-customer channels. The company expects to close all its Gilly Hicks stores by the end of first-quarter fiscal 2014.
In relation to the store closures, the company expects to incur about $90 million of pre-tax charges associated with the Gilly Hicks restructuring plan. As of Feb 1, 2014, the company has incurred about $81.5 million of the said $90 million charges and hopes to record the remaining in the first quarter of fiscal 2014. Apart from the aforementioned restructuring charges the company has incurred an operating loss of nearly $30 million in fiscal 2013 associated with the Gilly Hicks operations.
Outlook
Abercrombie projects fiscal 2014 earnings to range from $2.15 – $2.35 per share, mainly driven by the expectation of high-single digit comps decline and about 20% increase in comparable direct-to-consumer sales. Additionally, the company projects a flat to slightly down gross margin rate as compared with the fiscal 2013 level. For the full year, the company anticipates tax rate of about 35% and nearly 78 million of shares outstanding.
During fiscal 2014, Abercrombie intends to open about 16 full-price international outlets, comprising one flagship Abercrombie & Fitch store in Shanghai in April 2014 and a small number of Abercrombie & Fitch mall-based stores. Additionally, it plans to open a smaller number of international and U.S. outlet stores in fiscal 2014. Store closures in the U.S. through lease expirations is expected to sum to about 60–70 during fiscal 2014.
The company anticipates capital expenditure of approximately $200.0 million or more in fiscal 2014, including the effect of timing shifts from fiscal 2013.
Further, the company expects to save a minimum of $175 million (gross) from its ongoing profit improvement initiative through fiscal 2014. These savings include about $30 million already saved in fiscal 2013 and additional $145 million anticipated to be saved in fiscal 2014 along with incremental savings expected beyond fiscal 2014.
However, these savings are expected to be offset by a $30 million or higher increase in marketing expenditures in fiscal 2014 relative to fiscal 2013, with the majority of the additional expense expected to be incurred in the first half of the year.
Other Stocks to Consider
Currently, Abercrombie carries a Zacks Rank #3 (Hold). Better-ranked stocks in the apparel/shoe industry include Christopher & Banks Corporation (CBK), Finish Line Inc. (FINL) and Deckers Outdoor Corp. (DECK). Christopher & Banks have a Zacks Rank #1 (Strong Buy), while Finish Line and Deckers carry a Zacks Rank #2 (Buy).
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