Abercrombie's Upbeat 3Q - Analyst Blog

Abercrombie & Fitch Co. (ANF) registered earnings of 56 cents a share in the third quarter of fiscal 2010, thereby surpassing the Zacks Consensus Estimate of 51 cents a share and handily reversing the prior-year net loss of 35 cents. The teen retailer's strong results primarily emanated from the company's strategy of price cuts and promotions, which boosted top-line growth.

Result Summary

Abercrombie reported double-digit net sales growth of 18% climbing to $885.8 million from $753.7 million in the prior-year period. The growth reflected an 8% increase in domestic net sales and an 87% surge in international net sales.

Overall comparable-store sales rose 7%. Direct-to-consumer merchandise sales jumped 32% to $81.4 million in the reported quarter. Abercrombie & Fitch brand comparable-store sales rose 8% and abercrombie kids store recorded a sales growth of 2%. Hollister Co. reported comparable store sales growth of 7.0% in the quarter. Total revenue beat the Zacks Consensus Estimate of $879.0 million.

Average unit retail, however, declined 11.0% in the quarter. Consequently, gross margin dropped 40 basis points to 63.7% from 64.1% in the year-ago period.

Conversely, stores and distribution expenses, as a percentage of sales, declined to 43.5% from 46.4% in the prior-year period helped by a fall in store occupancy costs and payroll costs.

Higher compensation and benefits resulted in an increase in marketing, general and administrative expenses, which climbed 17.0% to $102.6 million in the quarter under review. Operating income for the quarter increased $30.9 million to $78.4 million versus $47.4 million in the same quarter last year.

Balance Sheet

Abercrombie ended the quarter with cash and cash equivalents of $618.2 million and shareholders' equity of $1,846.8 million.

Store Update

The company ended the quarter with a total store count of 1,106. The company expects to incur capital expenditure of $190 million in fiscal 2010. A portion of the cash will most likely fund a slew of new-store openings.

Moving forward, the company expects to open 20 international mall-based Hollister stores, 1 Abercrombie & Fitch store, 1 Hollister Epic store on 5^th Avenue in New York and 1 domestic Gilly Hicks store, all during the fourth quarter.

Since the commencement of the fourth quarter, the company has opened Abercrombie & Fitch flagships in Fukuoka, Japan and Copenhagen, Denmark and will also open its first international Gilly Hicks store in the United Kingdom during the quarter.

One of the nearest competitors of Abercrombie, Urban Outfitters Inc. (URBN) recently reported earnings of 43 cents a share in the third quarter of fiscal 2010.

We currently have a short-term Zacks #3 Rank (Hold) rating and a long-term Neutral recommendation on the company.

 
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