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Abercrombie & Fitch Earnings Preview: Back to School Versus Big-Box Budgeting

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Abercrombie & Fitch Earnings Preview: Back to School Versus Big-Box Budgeting

Fashion retailer Abercrombie & Fitch (NYSE: ANF) is slated to report second-quarter earnings on Wednesday, August 15 before market open. Wall Street analysts expect earnings per share (EPS) of $0.17 on revenue of $995.7 million.

Abercrombie reported EPS of $0.03 in the previous quarter, beating analyst estimates of $0.02. Revenue for the company grew 10 percent to $921.2 million from year-ago period revenue of $836.7 million. On August 1, the company released second-quarter guidance for diluted EPS of $0.15 to $0.18 and fiscal-year guidance for diluted EPS of $2.50 to $2.75.

Back to School Versus the Big Box

Abercrombie produces specialty apparel for the retail industry, alongside competitors The Buckle (NYSE: BKE), American Eagle Outfitters (NYSE: AEO) and The Gap (NYSE: GPS). As a cyclical sector, the retail industry is known to move with consumer trends such as holiday and back-to-school shopping.

Back-to-school spending is expected to top $53 billion this year, and the average family is expected to spend $688.62 on its shopping, according to the National Retail Federation.

Although this number represents a 14 percent increase from the previous year's season, the consumer may not yet feel comfortable coming out of the U.S. economy's recent recession levels.

Moreover, specials offered by discount and big-box retailers such as Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) - as well as online shopping giants such as Amazon (NASDAQ: AMZN) - may cut significantly into specialty retailers' cut of the commerce. Consumers looking for a "one-stop" school supplies experience may be more likely to spend at stores that offer bargains on the essentials.

It is also predicted that consumers may spend heavier in the months of August and September, continuing a shift from shopping initiated in July during earlier years. Students may hold off on purchasing specialty clothing until they start school, when they can see what is "cool" for the year ahead. This may prove beneficial for Abercrombie, as the brand arguably positions itself for the "cool" trends.

July's same store numbers for retail served to display both winners and losers, with Gap and Macy's (NYSE: M) leading the charge and beating analyst estimates.

Limited Brands (NYSE: LTD) and Ross Stores (NASDAQ: ROST) also beat estimates, while Wet Seal (NASDAQ: WTSLA) led the decliners.

Analyst Opinion

Abercrombie's recent drop in guidance spurred a rash of analyst downgrades at Oppenheimer, Piper Jaffray and Bank of America Merrill Lynch, among others.

In Piper Jaffray's report, the analyst firm downgraded Abercrombie from Overweight to Neutral, noting:

"We recognize ANF shares have pulled back meaningfully to-date but we have little conviction in significant upside potential given uncertainty surrounding deleverage in the core operating model, a challenged domestic brand position, and diminishing returns on capital investments."

Later in the week, J.P. Morgan reiterated its Neutral rating on Abercrombie, and lowered its price target from $38 to $30.

In the report, J.P. Morgan noted that the clothing company has lost more than 30 percent of its domestic sales productivity from peak 2007 levels:

"The domestic landscape appears to be showing signs of improving with more normalizing inventories, however, competition between AEO, ARO and others including fast fashion retailers such as H&M and Forever 21 remains. We believe the company will continue to work on regaining productivity domestically through closures of underperforming stores (management noted that the top 250 stores are at comparable margins to the international stores)."

Conclusion

Abercrombie has enjoyed double-digit revenue growth year-over-year across the past four quarters, but a decline in net income in each of the past two quarters.

The majority of surveyed analysts covering the company recommended holding the stock, although nine analysts gave the stock a Buy or equivalent rating.

Shares of Abercrombie were down more than 34 percent year-to-date at Friday closing levels, and have been down more than 31 percent in the past three months. The company has a price-to-earnings ratio close to 27.1 and offers a dividend of $0.17.

 

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