It has been about a month since the last earnings report for Abercrombie & Fitch (ANF). Shares have lost about 12.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Abercrombie due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Abercrombie Q3 Earnings Beat, Digital Sales Rise
Abercrombie posted third-quarter fiscal 2021 results, wherein both the top and bottom lines not only surpassed the Zacks Consensus Estimate but also improved year over year. A robust back-to-school season contributed to the company’s upbeat performance. Evidently, lower promotions and markdowns, efficient expense management, and strategic investments across marketing, technology and fulfillment aided the results.
However, it is reeling under ongoing supply-chain bottlenecks, including production and delivery delays as well as higher freight costs. Well, the company has been trying all means to navigate through these challenges.
Overall Sales & Earnings Picture
Abercrombie & Fitch delivered adjusted earnings of 86 cents a share in third-quarter fiscal 2021 that comfortably surpassed the Zacks Consensus Estimate of 68 cents and increased from 76 cents earned in the year-ago quarter. The year-over-year increase in the bottom line can be attributed to higher net sales.
Net sales of $905.2 million advanced 10% year over year and exceeded the Zacks Consensus Estimate of $894.4 million. Digital net sales rose 8% to $413 million and represented 46% of total sales. We note that store sales jumped 11% from the year-ago period. Better customer engagement, digital and omni-channel enhancements, and higher average unit retail or AUR across brands and channels aided the top-line performance.
Sales By Region and Brands
Sales were strong in the United States, up 17% year over year to $654.9 million. However, International sales declined 4% to $250.3 million owing to lower sales in the EMEA and APAC regions.
Sales in the EMEA region fell 6% to $179.2 million. Business remained strong in the U.K., thanks to favorable customer response for products. This was offset by continued COVID-induced restrictions and impacts across key Western European countries, including prime markets, Germany and France. In APAC, sales were down 12% to $38.2 million because of traffic headwinds due to coronavirus cases inside China and Hong Kong and slow vaccination progress in Japan.
Brand wise, net sales at Hollister advanced 10% year over year to $522.3 million, while at Abercrombie, the metric increased 12% to $382.8 million.
Margins
Gross profit increased 10% year over year to $576.2 million, however, gross margin contracted 30 basis points to 63.7%. The gross profit rate decline was due to roughly 300 basis points of higher average unit cost from freight inflation and efforts to mitigate supply chain challenges, offset by higher AUR on lower promotions.
Operating expense, excluding other operating income, net, rose 8% from the year-ago period. This increase reflects higher marketing expenses and payroll and a decrease in store occupancy. As a percentage of sales, operating expenses decreased to 55.8% from 56.8% last year. Adjusted operating income totaled $79.5 million compared with $64.9 million in the year-ago quarter. We note that operating margin expanded 90 basis points to 8.8%.
Other Financials
Abercrombie & Fitch ended the quarter with cash and cash equivalents of $865.6 million, long-term gross borrowings under the senior secured notes of $308 million, and stockholders’ equity of $918.3 million. Net cash provided by operating activities was $131.3 million for the year-to-date period ended Oct 30, 2021.
Management continues to anticipate capital expenditures of approximately $100 million for fiscal 2021. About 50% of the capital spending is expected to be utilized for investments in digital and technology and the other half in real estate and maintenance items.
During the quarter under review, the company repurchased 2.7 million shares for $100 million. The company’s board of directors approved a new share buyback program of up to $500 million, replacing the February 2021 share repurchase program of 10 million shares, which had 3.9 million shares remaining. In the final quarter, the company intends to repurchase at least $100 million worth of shares.
Store Update
In the third quarter, the company opened five stores and closed three locations. This brings the total both year-to-date store openings and store closures to 23. As of Oct 30, 2021, the company’s total store base was 735, including 536 stores in the United States and 199 stores internationally.
Outlook
For the fiscal fourth quarter, management envisions net sales to be up 3-5% from the 2019 reported level of $1.185 billion. It expects the United States to continue to outperform the EMEA and APAC regions.
Abercrombie & Fitch expects the gross profit rate to be around flat to the 2019 level of 58.2%. The guidance takes into account an expected adverse impact of $75 million of freight cost pressure due to increasing ocean and air rates as well as higher air deliveries. Nonetheless, given positive customer response to holiday, the company remains committed to lower markdowns and promotions to improve AUR to offset this headwind.
The company anticipates operating expenses, excluding other operating income, to be up in the low to mid-single digits to 2019 adjusted level of $565 million.
Considering the above mentioned expectations, management guided operating margin of 9-10% for the current fiscal year — the highest since fiscal 2008.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 11.28% due to these changes.
VGM Scores
At this time, Abercrombie has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Abercrombie has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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