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

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Fashion retailer Abercrombie & Fitch
ANF
is slated to report second quarter (Q2) earnings on Wednesday, August 15, before market open. Analyst consensus expects 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 the year-ago period of $836.7 million. The company released Q2 guidance on August 1 of diluted EPS of $0.15 to $0.18 and fiscal-year 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
BKE
, American Eagle Outfitters
AEO
and The Gap
GPS
. As a cyclical sector, the retail industry is known to move with consumer trends such as holiday shopping and the back-to-school season. Back-to-school spending this year 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
WMT
and Target
TGT
- as well as online shopping giants such as Amazon
AMZN
- may cut significantly into a specialty retailer's 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 earlier years of shopping initiated in July. Students may hold off on purchasing specialty clothing until around classmates, waiting to 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 the winners and the losers, with Gap and Macy's
M
leading the charge and beating analyst estimates. Limited Brands
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LTD
and Ross Stores
ROST
also beat estimates, with Wet Seal
WTSLA
leading the decliners.
Analyst Opinion
Abercrombie's recent drop in guidance spurred a rash of analyst downgrades - 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 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)."
The Takeaway
Abercrombie has enjoyed double-digit revenue growth year-over-year (YOY) across the past four quarter, with a decline in net income in the past two quarters. The majority of analysts covering the company recommend Holding the stock, although nine analysts give the stock a Buy or Strong Buy rating. Shares of Abercrombie were down more than 34 percent year-to-date (YTD) at Friday market closing levels, and were down more than 31 percent in the past three months. The company has a price-to-earnings (P/E) ratio of 27.13 and offers a dividend of $0.17.
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Posted In: Analyst ColorEarningsLong IdeasNewsGuidanceShort IdeasDividendsDividendsDowngradesPrice TargetPreviewsTopicsEcon #sPre-Market OutlookMarketsAnalyst RatingsTrading IdeasGeneralabercrombieApparel RetailApparel StoresBack to Schoolconsumer cyclicalConsumer DiscretionaryDepartment Storesholiday shoppingNational Retail Federationretail
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