RealMoney Silver - ANF Preview: Teens Still Getting Their Way?

ANF Preview: Teens Still Getting Their Way?
By Gary Dvorchak
RealMoney Contributor
5/15/2008 3:43 PM EDT

Investors are looking to off-price and low-end retailers for some shelter in the economic storm, but the teen retailers may offer safe harbor as well. Teens are notoriously ambivalent to the concerns of the adult world and will blithely keep spending as long as the allowance and part-time job is there. The latter is the catch for teen retailers, as some part-time jobs are disappearing in this pseudo-recession so that even the best of the teenies are seeing an impact.

A typically strong name, Abercrombie & Fitch (ANF) should earn 66 cents per share this quarter, flat with last year but somewhat lower than the original expectation of 76 cents at the start of the quarter. Revenue of $800 million was already announced, so, to make the EPS, operating margins can decline only 150 basis points, which doesn't seem undoable.

Of course, the negative 3% comp for the first quarter doesn't help the cause, as the fixed-cost leverage can be severe, but last quarter, Abercrombie & Fitch increased operating margins on a slightly negative comp. Clearance levels are up vs. the year-ago period, too, so gross margins will remain under pressure for the time being. A real women's fashion trend certainly would help.

Abercrombie & Fitch is going full speed ahead on growth this year, expanding square footage 11% via 114 new stores. Ruehl, Gilly Hicks and international will be the focus on the call, as these new concepts are the real drivers of unit growth. Ruehl has struggled for years, so expectations are low; Gilly was just introduced in fourth quarter 2007, so hopes will be high. Hollister is the bread and butter for growth, but with an impressive $550 per square foot of sales, squeezing comp contribution out of the concept will start to prove difficult. Meanwhile, keep an eye on Internet sales, they are "massively accretive" in management's words and can provide the profit boost that on-the-ground stores may lack.

The call starts at 8:30 a.m. EDT.

At the time of publication, Dvorchak had no positions in stocks mentioned, although positions can change at any time.

Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.

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