Abercrombie & Fitch Co. (ANF) continued with its positive earnings surprise trend for four consecutive quarters. The company’s second-quarter fiscal 2014 earnings came ahead of the Zacks Consensus Estimate and also grew year over year gaining from its profit improvement initiative that focuses on enhancing return on invested capital and operating margin growth. Cost containment effort also contributed to bottom-line growth.
Success of the company’s profit enhancement initiative was evident from the quarterly results, wherein operating margin expanded despite weakness in sales. The company reaffirmed its fiscal 2014 earnings guidance range of $2.15–$2.35 per share, implying year-over-year growth of 12%–23%.
Further, we believe the company’s sustained focus on expanding its global operations and improving cash flows, while maintaining a healthy balance sheet, bodes well for future growth.
As part of its global growth initiative, the company is aggressively expanding its Hollister stores in the new markets and intends to open more of those in China and the UAE. Moreover, among developed economies, the company plans to open more stores in Australia and Japan, which display substantial growth opportunities for value-focused products.
The idea behind the expansion of this brand is that its smaller size of operation makes it cheaper and less capital intensive compared with the company’s namesake brand. Based on these positive factors, we believe that growth of the Hollister brand internationally could drive overall profitability.
Moreover, Abercrombie, which competes with Gap Inc. (GPS), American Eagle Outfitters Inc. (AEO) and Aeropostale Inc. (ARO), has shifted the focus toward closing its underperforming U.S. chain stores in order to drive top-line growth, while enhancing profitability. In an effort to enhance its performance, the company shut down all of its stand-alone Gilly Hicks stores in the first quarter. However, it decided to continue offering the brand’s intimate apparel through its Hollister stores and direct-to-customer channels.
Despite all the above mentioned factors, the company’s comps performance depicts a downward trend with disappointing results over the past 10 quarters. In the most recent quarter, the company reported a 7% decline in comps, due to sluggish performances in both domestic and international markets. Moreover, Abercrombie expects comps to fall in the mid single-digit percentage range in fiscal 2014. This makes us apprehensive about the company’s near-term performance.
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