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Abercrombie (ANF) Down 35% in 3 Months: Will it Bounce Back?

Zacks Equity Research

Shares of Abercrombie & Fitch Co. ANF have been losing sheen lately owing to the revised expense view for fiscal 2019 on account of adverse impacts from foreign currency and higher operating expenses. Soft view for the fiscal second quarter further raises concerns on the company’s near-term performance.

However, Abercrombie’s surprise trend remains robust with eight straight quarters of positive earnings surprise and sales beat in eight out of the last nine quarters. Quarterly results gained from solid strategic efforts, comparable sales growth and robust digital business. Moreover, strategic capital investments, cost-saving efforts, loyalty and marketing programs might help the company bring back its lost shine.

Factors Hurting Stock Performance

For the current fiscal year, operating expenses, excluding other operating income, are now expected to increase nearly 4-5%, up from the prior view of a 2% rise. Increase in operating expenses mainly reflects net lease-related charges of about $45 million (or 220 bps) due to the closure of the SoHo and Fukuoka flagships. For second-quarter fiscal 2019, operating expenses, excluding other operating income, are estimated to increase 10% from adjusted operating expenses of $498 million in second-quarter fiscal 2018. Also, adjusted operating expenses are likely to be flat to up 1%.

Additionally, the company issued soft sales and margin outlook for the fiscal second quarter. Management anticipates sales to be flat to up 2%, down from 8% growth registered in second-quarter fiscal 2018. Comps are anticipated to remain flat compared with an increase of 3% in the prior-year quarter. Gross margin is likely to contract nearly 100 basis points from 60.2% reported in the year-ago quarter. Lower gross margin will mainly stem from expectations of increased currency headwinds and promotional activity.

Meanwhile, Abercrombie’s results are hurt by unfavorable foreign currency rates, which are likely to continue throughout the fiscal year. For fiscal 2019, adverse currency is expected to mar the top line by nearly $30 million, up from the prior view of $15 million impact. For the fiscal second quarter, it anticipates sales to be hurt by nearly $10 million due to currency translations.

Consequently, shares of Abercrombie have plunged 35.1% in the past three months, wider than the industry’s 15.2% decline.



Strategic Endeavors Might Help Turnaround

Abercrombie’s strategic capital investments, cost-saving efforts, loyalty and marketing programs are gaining traction. Moreover, the company has been making significant progress in expanding digital and omni-channel capabilities. Its investments in mobile, omni-channel and fulfillment have significantly provided a boost to its digital business. Notably, the digital business continued to perform well backed by robust momentum across Abercrombie’s brands and geographies. In first-quarter fiscal 2019, digital channel sales contributed 30% to revenues. Further, the company is progressing well on its goal of delivering integrated digital and in-store shopping experiences.

As part of its store fleet optimization efforts, Abercrombie has made significant store closures over the last eight years. The company considers these closures as an opportunity to improve store productivity by reducing store occupancy costs. In fact, the global store optimization is a key component of the company’s efforts to ensure operating margin expansion and achieve its goals for fiscal 2020. For the next two years, the company has identified lease expirations for nearly 50% of its store base in the United States. Simultaneously, it expects to consistently invest in the enhancement of store experiences, mainly through new store prototypes, remodeled stores and right-sizes. In fiscal 2019, Abercrombie plans to deliver about 85 new experiences.

Bottom Line

While these strategic efforts appear promising, the aforementioned hurdles cannot be ignored. Nevertheless, we expect Abercrombie’s initiatives to offset these headwinds in the future.

Currently, Abercrombie carries a Zacks Rank #3 (Hold).

3 Better-Ranked Retail Stocks

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