RealMoney Silver - Weak Dollar, Iconic Brand Drives ANF Beat

Weak Dollar, Iconic Brand Drives ANF Beat
By Gary Dvorchak
RealMoney Contributor
5/16/2008 10:32 AM EDT

The parade of retail earnings beats continued with Abercrombie & Fitch's (ANF) positive results this morning. The company reported EPS of 69 cents, beating the Street by 3 cents, on revenue of $800.2 million, which rose 8% year over year. Management recited the litany of why the quarter was so tough -- economy, inflation, Easter shift, weather, etc. -- yet the company overcame and reported very strong results and reaffirmed guidance that is higher than the Street on an expected negative comp.

Female categories were weak in general, and especially in knit tops, due to Easter buying being pulled into the colder March period, yet the retailer maintained gross margins by avoiding promotions, sourcing more effectively and using some selective price increases. Gross margins were 120 basis points above last year's level, demonstrating the strength of the brand.

Abercrombie & Fitch managed inventory quite well, keeping it flat sequentially on a square foot basis. Spring items are down, but back-to-school build and the Gilly Hicks ramp are offsetting that. Management indicated that the inventory adjustment was mostly a one-time phenomenon. The company will keep inventory in line with sales trends, but this quarter's big reduction of 21% vs. the year ago won't be repeated.

One highlight in the quarter was international results, driven in part by the weak dollar. By "international," we also include the tourist stores in New York, Miami, San Francisco, etc., which are comping huge as foreign tourists enjoy the "America on sale" aspect of the dollar's foreign exchange value.

Notably, the flagship stores are great drivers of results due to the over-the-top nature of the experience. Tourists hitting the flagship stores in the U.S.,and the rollouts in London and other international locales will drive results. The flagship concept is highly accretive to earnings, despite the high cost of opening. Management expects to spend $2 million per quarter on flagship openings for the foreseeable future. Copenhagen will open in 2009, Tokyo Ginza soon after. International is only 13% of sales now, but look for a meaningful ramp in the years ahead as the company exploits its iconic brand awareness worldwide.

Also important to growth are the new concepts, Ruehl and Gilly Hicks, but management was coy on results here. Gilly is simply too early, with only five stores operating, but Ruehl is in the midst of an aggressive rollout. Analysts want to know if Ruehl will be profitable this year, but management deferred any comment until they see results this autumn.

Because the comp was negative, and is expected to be negative in the future, the "beat" today was a function of low expectations rather than stellar performance. Nonetheless, Abercrombie & Fitch is proving that teen spending can remain somewhat resilient in a weak environment. More importantly, the company is proving the strength of its brand by avoiding promotions to "buy sales" and sustaining margins.

Abercrombie & Fitch is a premium brand and premium stock, and should work well when the retail environment turns.

For Dvorchak's preview heading into the Abercrombie & Fitch conference call, please click here.