Abercrombie & Fitch Discusses Q2 Earnings During Conference Call
Following Abercrombie & Fitch's (NYSE: ANF) second quarter results on Thursday, company CEO Mike Jeffries hosted a conference call to discuss its results and future outlook.
The quarter in review
Jeffries kicked off the conference call by admitting that sales during the second quarter were “somewhat below our plan” due to the “challenging environment.” Nevertheless, the company was able to exceed its internal earnings expectations.
Abercrombie CFO Joanne Crevoiserat stated that the company realized $891 million in net sales during the quarter, down six percent from a year ago. Total worldwide comparable sales were down seven percent, while U.S. comparable sales were down five percent and International comparable sales were lower by nine percent.
Comp sales, including direct-to-consumers, were down one percent for the Abercrombie & Fitch brand, down six percent for Abercrombie Kids and down 10 percent for Hollister.
Gross profit during the quarter fell 180 basis points from a year ago to 62.1 percent due to an increase in promotional activity including shipping promotions. Crevoiserat noted that the promotional activity seen in the quarter was “somewhat lower” than the company had previously planned.
Marketing, general and administrative expenses declined six percent from a year ago to $111 million, due to a decrease in compensation expense, partially offset by an increase in marketing expense.
Abercrombie ended the quarter with $311 million in cash and cash equivalents and borrowing of $188 million. The company completed the refinancing of its credit facilities, which now consist of a $400 million revolving credit facility and a $300 million term loan B facility.
Abercrombie continued to focus on raising brand engagement during the quarter through various marketing initiatives and campaigns, which is showing positive signs for back-to-school sales.
During the quarter, the company opened its eighth Hollister store in China and will open its first mall-based Abercrombie & Fitch store in Chengdu, China. In Japan, the company opened its third Hollister store.
The company plans to open new stores in Dubai and Abu Dhabi this year, while new stores in China and Japan are expected to open throughout 2015.
Jonathan Ramsden, Abercrombie's COO, stated that the company expects another year of “strong growth” for 2014. Of note, the company expects to improve processing speed, throughput and service following the conversion of distribution center to be a dedicated direct-to-consumer facility.
Order-in-store capabilities remain on track for a third quarter roll-out at all U.S. stores. A ship-from-store pilot program will begin in the fourth quarter at approximately half of all U.S. stores. Finally, a reserve in-store and in-store pickup initiative is scheduled for 2015.
According to Ramsden, the company is now expecting its gross savings from recent initiatives to exceed $200 million, compared to prior projections of at least $175 million. However, the savings will be partially offset by a $39 million increase in marketing expenditures throughout 2014.
Capital expenditures is expected to remain at approximately $200 million annually as the company continues to remodel Hollister storefronts, and an Abercrombie & Fitch storefront remodel project is expected to begin in the third quarter.
Abercrombie expects to open 14 full-price international stores, including eight Hollister stores and five Abercrombie & Fitch stores, by the end of 2014. The company also expects to open eight to 10 international and U.S. outlets.
At the same time, the company expects to close approximately 60 stores in the U.S. during 2014, through natural lease expiration. Additionally, a similar number of stores will be closed in each of the next few years.
Ramsden maintained prior financial guidance, and the company still expects its full-year earnings to be in a range of $2.15 to $2.35. The guidance is based on the assumption that full-year total comparable sales will be lower by a mid single-digit percent and gross margin will be lower than it was in 2013.
Abercrombie is also on track to launch localized sites and in-country fulfillment in China as soon as next month. The company will also have regional fulfillment from Hong Kong for other Asian countries.
Mike Jeffries on what to expect in the fall and spring season:
“For the fall season, we're saying that we're going to be having the amount of business we did last year. In the spring season, we're looking to take the North American logo business to practically nothing, but protect logo in international stores.”
Brian Logan on shipping expenses:
“A big part of the pressure is around the shipping and handling revenue and expense, partly as we've begun to offer shipping promotions in Asia, and internationally generally. When we do those, the shipping expense there is greater, particularly for Asia. One of the bits of good news on that is as we enable fulfillment within Asia, our shipping expense when we run those free shipping promotions with the threshold will be much lower than it is today. So the -- part of the effect is just the shipping and handling revenue coming down as we've continued to use shipping and handling promotions and been competitive on that, but also because of the skew of our business to international, the rapid growth in Asia when we run those promotions, there's greater shipping expense which, as I just said, will alleviate as we enable the regional fulfillment.”
Mike Jeffries on logo headwinds:
“I think I can say this, is that we are making up the logo decline in the business in terms of tops, which says that we're doing better than the rest of the business, which we are, and that's fashion-related. There is wonderful traction in fashion, partially due to our Chase strategy. Chase is working wonderfully well for us. How long the impact of logo will last, clearly through this year into first quarter of next year. But as I just said, we would, say in North America, we'd want to be out of the logo business essentially by next spring. It will remain a factor in the rest of the world. I would say that by this time next year, we'll really be over the major dollars.”
Mike Jeffries on denim performance:
“We're happy with how denim has performed. As we said, comp sales were up, but gross profit was up, too. We're able to drive the business through expanded assortment, I think, compelling price points and engaging store and DTC presentations that were supported by lifestyle marketing.”
Jonathan Ramsden on the promotional environment:
“We're assuming the environment will remain promotional. I think there are some indications that it may become less so, and certainly as we look at the back half of the year, inventory levels are probably going to be more rational and normalized than they were a year ago, which should help to see year-over year-relief, but generally speaking we'd expect the environment will remain fairly promotional.”
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