Abercrombie (ANF) Misses on Q3 Earnings & Sales, Updates View

Abercrombie & Fitch Co. ANF reported top and bottom-line miss in third-quarter fiscal 2019. Moreover, earnings declined on a year-over-year basis, while sales were flat. Further, management updated the view for fiscal 2019 on the anticipated impacts of currency and tariffs.

The company expects List 3 and List 4 China tariffs to hurt cost of goods sold and gross profit by $4 million in the fourth quarter and $5 million in fiscal 2019.

Backed by the dismal results, shares of the company declined 2.6% yesterday. In the past three months, the Zacks Rank #3 (Hold) company has lost 4.6% against the industry's 13.5% growth.

Q3 Earnings & Sales

Abercrombie reported earnings of 23 cents per share in the fiscal third quarter, missing the Zacks Consensus Estimate of 25 cents. Further, the bottom line declined 30.3% from adjusted earnings of 33 cents in the year-ago quarter. In constant currency, adjusted earnings declined 14.8% year over year.

Net sales totaled $863.5 million, which missed the Zacks Consensus Estimate of $870 million and were flat with the year-ago quarter. On a constant-currency basis, the top line rose 1%. Sales included an $8-million impact of unfavorable currency.

Sales gained from a solid back-to-school period in August and continued momentum in October, partly negated by a challenging retail environment, resulting from unseasonably warm weather in September and ongoing disruptions in key international markets.

Brand-wise, net sales were flat at $514.8 million for the Hollister brand, while it rose 1% to $348.7 million for Abercrombie. From a geographical viewpoint, net sales grew 4% in the United States, while dropped 6% in international markets.

Comps in Detail

Comparable sales (comps) remained flat against 3% growth in the year-ago quarter. Brand-wise, comps declined 2% for Hollister and improved 3% for Abercrombie.

Moreover, comps benefited from strong performance in the United States, owing to continued double-digit growth in digital and positive traffic trends. Further, Hollister and Abercrombie brands witnessed positive comps in the United States. Notably, U.S. comps improved 3%.

However, this was partly offset by an 8% decline in comps in international markets primarily due to escalating macro headwinds in key markets. The company is facing uncertainty related to Brexit, which continues to hurt sales in the U.K. — its largest international market. Additionally, ongoing protests in Europe and Asia, particularly in Hong Kong, are weighing on results. Also, extremely hot weather in Europe in late August and early September hurt sales for soft clothing and accessories.

Notably, Hollister has greater international presence compared with Abercrombie. Consequently, comps for the Hollister brand reflect the impacts of the aforementioned headwinds related to the international business.

Margins

Gross margin contracted 120 basis points (bps) to 60.1%. In constant currency, gross margin declined 80 bps, including 50 bps of impact from higher shrink losses as well as headwinds of 30 bps from increased average unit costs (AUC).

Adjusted operating income of $25 million declined 32.4% year over year. This included a $5-million headwind from adverse currency. Further, adjusted operating margin contracted 140 bps. In constant currency, adjusted operating margin declined 80 bps year over year.

Other Financials

Abercrombie ended the fiscal third quarter with cash and cash equivalents of $410.8 million, and gross borrowings under its term-loan agreement of $243.3 million. As of Nov 2, 2019, inventories amounted to $590.9 million, reflecting 3% growth from the prior-year period. In the first nine months of fiscal 2019, the company spent $154.4 million as capital expenditure.

Moreover, Abercrombie expects inventories to be up in low to mid-single digits at the end of the fiscal fourth quarter, driven by tight inventory controls.

The company also bought back 412,000 shares in third-quarter fiscal 2019 for nearly $6 million. With this, it repurchased about 4 million shares in the first nine months of fiscal 2019. At the end of the fiscal third quarter, Abercrombie had 4.6 million shares remaining under its current share-repurchase authorization. In the first nine months of fiscal 2019, the company returned $102.5 million via share repurchases and dividends.

On Nov 13, the company declared a quarterly dividend of 20 cents per share on Class A shares, payable Dec 16, 2019, to shareholders of record as of Dec 6.

Store Update

Abercrombie has been working to optimize the store fleet. Notably, global store optimization is a key component of its efforts to deliver operating margin expansion and reach goals for fiscal 2020.

As part of its continued focus on optimizing store fleet, the company delivered 34 new store experiences in the reported quarter, including 19 Hollister, six Abercrombie adults and nine kids. This brings the year-to-date total to 70 new store experiences. It is currently on track to deliver about 85 new experiences in fiscal 2019.

Outlook

For fiscal 2019, Abercrombie now estimates flat to 1% rise in sales, backed by comps growth and contributions from new stores. This will likely be offset by adverse impacts of currency of $40 million, of which $35 million was witnessed in the first nine months of fiscal 2019. Earlier, the company projected sales growth of flat to up 2%.

Further, it projects comps of flat to positive 1% versus flat to positive 2% mentioned earlier. It reported an improvement of 3% in the year-ago period.

For the fiscal year, the company expects gross margin decline of 100 bps from 60.2% reported in fiscal 2018. This includes headwinds of 40 bps from adverse currency and anticipated China tariffs. Earlier, the company had projected gross margin decline of 50-90 bps.

It expects rise in operating expenses, excluding other operating income, of 2-3% from adjusted operating expenses of $2.03 billion reported in fiscal 2018. The view for operating expenses includes flagship store exit charges of $45 million incurred in the fiscal second quarter and asset impairment charges of $13 million incurred in the third quarter. Furthermore, it anticipates effective tax rate in the mid-20s.

Additionally, Abercrombie continues to envision capital expenditure of $200 million for fiscal 2019.

For the fiscal fourth quarter, the company anticipates sales of flat to up 2% from the prior-year quarter. This includes an adverse impact of nearly $5 million from negative currency translations. Meanwhile, it anticipates comps of flat to positive 2%, whereas it reported a 3% increase in the year-ago quarter.

The company expects a gross margin decline of 150 bps from the year-ago quarter’s reported level of 59.1%. This will likely include adverse impacts of 70 bps from currency and China tariffs.

Abercrombie expects operating expenses (excluding other operating income) to remain flat or increase around 2% from adjusted operating expenses of $555 million reported in fourth-quarter fiscal 2018. It anticipates effective tax rate in mid-to-upper 20s.

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