Updated from 4:40 p.m. EDT
Abercrombie and Fitch
has posted 43 straight quarters of year-over-year earnings growth. The question is whether that record is good enough for investors.
On Tuesday, the clothing retailer reported that its second-quarter earnings per share jumped 13%, while overall sales increased 8.1%. But the company also reported an 8% decline in same-store sales in the quarter, prompting questions from analysts on a conference call about the company's strategy for boosting its growth.
The problem is that most sell-side analysts and many investors are so focused on Abercrombie's top-line problems that they are missing its performance on the bottom line, said Rob Wilson, who covers the company for Tiburon Research Group.
"They can't win," said Wilson. "They have the most successful business model in retail, but people continue to beat them up."
(Tiburon Research Group doesn't do investment banking.)
Indeed, while Abercrombie shares have risen 43% this year, they still trade at a discount to many other retailers. The company's shares are currently valued at about 13.5 times Abercrombie's projected earnings this year. That compares with fashion rivals
, both of which trade for more than 23.5 times their projected earnings this year, and
, which trades for about 20 times projected 2003 fiscal year earnings.
American Eagle Outfitters
trades at a premium to Abercrombie, despite its own struggles with sales and despite having earnings this year that are expected to fall below last year's levels.
For those looking for trouble at Abercrombie, there is much to ponder, of course. While the company met analysts' bottom-line expectations in the third quarter, it fell far short of analysts' revenue projections, according to Thomson First Call.
The company tallied $355.7 million in sales in the second quarter, which was 8% greater than in the second quarter last year. But Wall Streeters were expecting Abercrombie to ring up $365.6 million in sales in the quarter.
Although the company posted overall sales growth, its same-store sales, which compare results at outlets open more than one year, fell again in the quarter. Through July, the company's comparable-store sales had fallen in six straight months and in 25 of the previous 27 months.
faulty statistic, same-store sales are widely tracked as an indicator of retailers' health and market share.
While the company may have addressed analysts' bottom-line concerns this quarter, it gave them more to worry about going forward. Company officials expect its comparable-store sales to perform similarly in the third quarter as they did in the second. The company expects to merely meet or slightly beat last year's 48-cents a share third-quarter profit, while analysts were expecting 54 cents a share.
That projection may be discouraging for investors and analysts, but Abercrombie has made a habit of improving on its past performance on the bottom line despite disappointing sales.
While many of its peers boosted sales in recent months through sales and discounts, Abercrombie has tried to limit, if not eliminate, such promotions, company officials said. The company's idea is to protect its brand image and not get into a pricing war with competitors.
One result of this is the company loses sales, as seen in its comparable-store sales reports. But another outgrowth is that its profit margins tend to increase.
In the second quarter, Abercrombie posted a gross profit margin of 40.57%. The company's gross margin, which is the difference as a portion of sales between what it charges consumers for its products and what it pays suppliers for them, was up 51 basis points from the same period last year.
Company officials attributed the gain to higher initial markups on its clothes, especially at its new Hollister chain.
Meanwhile, concern about the company's same-store sales ignores what the company's done to control operating costs. In the second quarter, Abercrombie's general, administrative and store operating expenses fell about 7 basis points as a portion of sales to 24.9%.
This decline came despite the fact that the company saw increased legal costs in the quarter due to a lawsuit filed against it in California and Pennsylvania related to labor issues. Legal costs related to those suits cost the company 2 cents a share on the bottom line, company officials said.
The company was able to reduce its operating costs as a portion of sales through reduced payroll expenses, greater productivity at its new distribution center and a decrease in incentive compensation, officials said.
Add up the cost savings, and Abercrombie was still able to beat Wall Street's bottom-line expectations, despite its slower-than-expected sales. For the second quarter, the company earned $34.8 million, or 35 cents a share, compared to $31.1 million, or 31 cents a share in the year-ago period.
Analysts were expecting the company to earn 34 cents a share.
Tiburon Research's Wilson acknowledges that sales growth is a concern, especially for growth-oriented investors and analysts.
"Growth investors will continue to be disappointed here," he said. "Until they launch a fourth
store concept, or some overseas initiative, until something like that happens, this is a value stock."
But just because Abercrombie's growth story is muddled doesn't make it a bad investment, Wilson argues.
"This is a quintessential value story: a beaten down stock that doesn't have a growth stock multiple anymore," he said.