Shares of the New Albany, Ohio-based clothing retailer were dropping 4.5% to $42.03, trimming its gain for 2014 to 28%.
Abercrombie reported second-quarter earnings, including charges, of 17 cents a share for the three-month period ended Aug. 2, compared to 14 cents a share for the same period a year ago. Consensus estimates called for 11 cents a share. Adjusted earnings came in at 19 cents a share.
Net sales missed Wall Street expectations, posting $891 million, down 6% from a year earlier, and below the $909.8 million consensus estimate. Same-store sales declined 11%, worse than the consensus estimate of -4.1%, as tallied by Consensus Metrix, led by a 10% drop at Hollister, where the company has been focused on lowering prices to compete with the fast-fashion players in the mall. Same-store sales at the company's flagship brand dropped 1% and abercrombie kids declined 6%.
Here's what analysts are saying about Abercrombie following its earnings report.
Eric Beder, Wunderlich Securities (Buy; $48 PT)
We reiterate our Buy rating, $48 price target and estimates after Abercrombie & Fitch (ANF) registered solid bottom line upside in 2QFY15. That said, ANF is down today as investors are "disappointed" with the company's -7% comp. Given the numerous material positives (better than expected gross margins, higher projected costs savings, YoY increase in international, etc.) we believe the Street is being typically short sighted and we would use the current dip to become even more aggressive in the name. We view Abercrombie as among the best positioned in the teen space to drive upside and one of the few management teams that realizes: a) less stores equals higher productivity; b) fashion will drive margin upside; and c) international offers appealing diversification. We are buyers of ANF.
Richard Jaffe, Stifel (Buy; $50 PT)
While 3Q might prove to be challenging for ANF due to a continuation of external headwinds and the fact that it takes time to win back customers, despite an improved fashion assortment, the current valuation does not give credit for the significant improvement that the company has made in its merchandise assortments at both Hollister and Abercrombie. Over the next twelve months we expect that ANF shares will be appreciated for this improvement and that consensus EPS will come up to our above consensus estimates.
Paul Lejuez, Wells Fargo Securities (Market Perform; $40-$42 valuation range)
Although headline EPS were better than expected, the way they got there was less than impressive, which again brings up the issue that ANF is underselling, not under-earning. Comps of down 7% decelerated vs Q1 of down 4%. And while comps at fellow teens were at least as bad (AEO down 7%, ARO down 13%), ANF's merchandise margin was -180bps (vs AEO +140bps, ARO +260bps). ANF's gross profit dollar decline of 8% was the same as Q1. One positive was finding an additional $25MM in annualized expense savings, but with weaker than expected sales, expense savings seem more defensive than offensive. Commentary of "modest" BTS [back-to-school] improvement (not as glowing as others who have reported Q2) means that the topline likely remains pressured as they transition away from logo toward more fashion.
Oliver Chen, Citigroup (Neutral; $42 PT)
ANF is maintaining its prior EPS guidance of $2.15-$2.35, but lowered its full year comps outlook to down -MSD vs. prior guidance for down -3% to -4%. The guidance still assumes a GM rate down slightly, due to AUR pressure and lower shipping & handling revenues partially offset by AUC improvement. Guidance now includes a slightly higher interest expense due to the company's recent refinancing of its credit facility. The company plans to open 14 full-price Int'l stores (including a small number of Int'l A&F mall-based locations) and 8-10 Int'l and US outlets stores & close ~60 stores in the US in natural lease expirations. Capex is expected to be $210-220mm, inclusive of capital spending for an expanded roll-out of the new Hollister store front to 75-100 stores by the end of the 2014.
TheStreet Ratings team rates ABERCROMBIE & FITCH as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate ABERCROMBIE & FITCH (ANF) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its good cash flow from operations, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, deteriorating net income and disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Net operating cash flow has significantly increased by 72.05% to -$40.14 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 25.53%.
- ANF's debt-to-equity ratio is very low at 0.12 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.91 is somewhat weak and could be cause for future problems.
- The gross profit margin for ABERCROMBIE & FITCH is rather high; currently it is at 69.37%. Regardless of ANF's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, ANF's net profit margin of -2.87% significantly underperformed when compared to the industry average.
- The share price of ABERCROMBIE & FITCH has not done very well: it is down 7.06% and has underperformed the S&P 500, in part reflecting the company's sharply declining earnings per share when compared to the year-earlier quarter. Looking ahead, other than the push or pull of the broad market, we do not see anything in the company's numbers that may help reverse the decline experienced over the past 12 months. Despite the past decline, the stock is still selling for more than most others in its industry.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Specialty Retail industry and the overall market, ABERCROMBIE & FITCH's return on equity significantly trails that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: ANF Ratings Report
--Written by Laurie Kulikowski in New York.