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Can Abercrombie’s (ANF) Strategic Actions Offset Hurdles?

Zacks

Abercrombie & Fitch Co. ANF has been gaining from its strategic initiatives and strength in Hollister as well as direct-to-consumer businesses. While the company is making aggressive strides to improve performance at its namesake brand, highly competitive environment and pressurized margins remain threats to the company’s turnaround.

However, Abercrombie & Fitch surged 34.5% in the last three months against industry’s gain of 21.1%. Let’s analyze the pros and cons of this Zacks Rank #3 (Hold) company.

Solid Strategic Actions Enhancing Performance: Outlook Raised


Abercrombie’s strategic capital investments, cost saving efforts, loyalty and marketing programs have aided the company’s performance as evident from its robust surprise trend. The company delivered earnings and sales beat in third-quarter fiscal 2017, marking the second straight positive earnings surprise and the third consecutive sales beat. Further, it remains encouraged by comparable store sales (comps) performance as it marked the fourth consecutive quarter of sequential improvement.

Given the strong performance, the company provided an encouraging view for fourth-quarter fiscal 2017. Comps are projected to be up low-single digits in the fiscal fourth-quarter while sales are anticipated to be in the band of up mid- to high-single digits. Going forward, foreign currency is expected to be tailwind for the company, slightly boosting sales and operating income.

Hollister Stores Have Potential for Growth

While Abercrombie’s namesake brand has been struggling, Hollister has been a savior for the company. Hollister stores have been delivering sustained comps performance since fourth-quarter fiscal 2016. Notably, comps for the brand rose 8% in the most recent quarter as it continued to capitalize on momentum, delivering positive comps in both the United States and international markets. Hollister is gaining from the positive customer response toward product innovations, emerging categories and overall customer experience.

In fact, the company has been focused on expanding Hollister stores in the new markets. The idea behind this is that its smaller size of operation makes it cheaper and less capital intensive compared with the company’s namesake brand. We believe Hollister brand’s growth internationally might enhance the company’s overall performance.

Strategic Initiatives

Abercrombie remains focused on reviving its brands, enhancing performance and returning to profitable growth. Notably, the company’s initiatives to spur growth include improving leadership team and organizational structure, optimizing store fleet by introducing stores in high-performing markets while closing underperforming ones, remodeling stores and assortments in order to meet changing trends and demands, developing omni-channel capacities and focusing on key merchandise and design processes. Additionally, Abercrombie keeps its discounts low along with a check on promotional activities in an attempt to enhance margins.

As part of its efforts to streamline operations, the company has been closing down underperforming U.S. chain stores. This will aid in boosting Abercrombie’s top and bottom lines. It also plans to shutter nearly 60 stores in the United States by the end of the fiscal year through natural lease expirations. This includes 14 stores which have been closed year to date. These store closures are anticipated to give Abercrombie more flexibility in terms of cost savings, amid a tough environment, where retailers are facing intense competition from continued shift to online shopping.

Strained Margins

As mentioned above, Abercrombie’s namesake brand continues to impede results. Notably, sales for the Abercrombie brand declined 2% to 351 million in the fiscal third-quarter, with comps falling 2%. While the company is making strides to improve performance at Abercrombie based on learning from Hollister, we believe full turnaround for the brand is still away.

Furthermore, the company has been witnessing strained margins for few quarters now due to soft traffic at stores as well as a highly promotional environment. Additionally, the company’s ongoing strategic initiatives to improve profitability have been weighing on the margins. Going forward, the company anticipates gross margin to decline roughly 100 bps in the fiscal fourth-quarter from the prior-year rate of 59.3%. Gross margin is likely to be pressured by higher average unit retail due to a competitive market environment.

Do Apparel Stocks Grab Your Attention? Check These

Investors interested may consider Zumiez Inc. ZUMZ, American Eagle Outfitters Inc. AEO and Boot Barn Holdings Inc. BOOT. While Zumiez and American Eagle flaunts a Zacks Rank #1 (Strong Buy), Boot Barn carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Zumiez Sports delivered an average positive earnings surprise of 22.2% in the trailing four quarters. It has a long-term earnings growth rate of 18%.

American Eagle pulled off an average positive earnings surprise of 2.3% in the trailing four quarters. In addition, it has a long-term earnings growth rate of 7.5%.

Boot Barn delivered an average positive earnings surprise of 22.2% in the trailing four quarters. It has a long-term earnings growth rate of 15.7%.

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