A month has gone by since the last earnings report for Abercrombie & Fitch (ANF). Shares have lost about 31.7% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Abercrombie due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Abercrombie Q4 Earnings Beat, Coronavirus to Mar FY20
Abercrombie & Fitch reported robust fourth-quarter fiscal 2019 results, wherein top and bottom lines outpaced the Zacks Consensus Estimate. While sales improved on a year-over-year basis, earnings declined. Further, management provided the view for fiscal 2020, which includes the impact of coronavirus outbreak.
In the fourth quarter and fiscal 2019, List 3 and List 4A China tariffs had direct adverse impact on cost of goods sold and gross profit of $4 million.
Q4 Earnings & Sales
Abercrombie reported adjusted earnings of $1.31 per share in the fiscal fourth quarter, surpassing the Zacks Consensus Estimate of $1.23. However, the bottom line declined 3% from adjusted earnings of $1.35 in the year-ago quarter. In constant currency, adjusted earnings grew 3.1% year over year.
Net sales totaled $1,184.6 million, which surpassed the Zacks Consensus Estimate of $1,166 million and increased 2.5% compared with the year-ago quarter. On a constant-currency basis, top line rose 3%. Sales included an unfavorable currency impact of $3 million.
Brand-wise, net sales were flat at $710.5 million for the Hollister brand, while it rose 7% to $474 million for Abercrombie. From a geographical viewpoint, net sales grew 5% in the United States and dropped 2% in international markets.
Comps in Detail
Comparable sales (comps) improved 1% compared with 3% growth in the year-ago quarter. Brand-wise, comps declined 2% for Hollister but improved 8% for Abercrombie.
Moreover, comps benefited from strong performance in the United States, owing to continued growth in digital and positive traffic trends. Further, Hollister and Abercrombie brands witnessed positive comps in the United States. Notably, U.S. comps improved 3%.
However, this was offset by a 3% decline in comps in international markets. Though still negative, international comps marked a sequential improvement driven by broad-based growth across regions and channels. This was, however, offset by the adverse impact on its Asia operations from coronavirus outbreak in the latter part of the quarter.
Gross margin contracted 90 basis points (bps) to 58.2% on higher AUC offset by increase in AUR. This includes adverse currency impacts of 50 bps. In constant currency, gross margin declined 40 bps.
Adjusted operating income of $124.6 million declined 3.9% year over year. This included a $7-million headwind from adverse currency. Further, adjusted operating margin contracted 10 bps. In constant currency, adjusted operating margin declined 20 bps year over year.
Abercrombie ended fiscal 2019 with cash and cash equivalents of $671.3 million, and gross borrowings under its term-loan agreement of $233.3 million. As of Feb 1, 2020, inventories were $434.3 million, reflecting 1% decline from the prior-year period. In fiscal 2019, capital expenditure was $202.8 million.
Moreover, Abercrombie expects inventories to be up in low single digits at the end of first-quarter fiscal 2020. This excludes potential supply chain disruptions resulting from the coronavirus.
Dividends and Share Repurchases
During fiscal 2019, the company repurchased about 4 million shares of its Class A shares. As of Feb 1, 2020, Abercrombie had 4.6 million shares remaining under its current share-repurchase authorization. In fiscal 2019, the company returned $115.1 million via share repurchases and dividends.
On Feb 21, the company declared a quarterly dividend of 20 cents per share on Class A shares, payable Mar 16, 2020, to shareholders of record as of Mar 6.
Abercrombie has been working to optimize its store fleet. Notably, global store optimization is a key component of its efforts to deliver operating margin expansion and reach goals for fiscal 2020.
As part of its continued focus on optimizing store fleet, the company delivered 90 new store experiences in fiscal 2019. For 2020, the company is on track to deliver 75 new experiences, including 30 Abercrombie and kids and 45 Hollisters.
For fiscal 2020, Abercrombie estimates flat to 2% rise in sales, indicating the estimated adverse impact of COVID-19 in the range of $60-$80 million and unfavorable impact of changes in foreign currency exchange rates of about $10 million. Further, the company projects comps to be down low single digits, which include predicted adverse impact of COVID-19 of around 200 bps. This compares to positive comparable sales of 1% last year.
For the fiscal year, the company expects gross margin decline of 50-70 bps from 59.4% reported in fiscal 2019. This includes headwinds of 30 bps from adverse currency and 50-70 bps from the anticipated adverse impacts of COVID-19.
The company expects operating expenses to be roughly flat from fiscal 2019 adjusted operating expenses of $2.07 billion. The view for operating expenses includes flagship store exit charges of $47 million. Furthermore, it anticipates effective tax rate in the upper 20s to low 30s. Additionally, Abercrombie continues to envision capital expenditure of $175 million for fiscal 2020.
For first-quarter fiscal 2020, the company anticipates sales to be down mid-single digits from the prior-year quarter. This includes an adverse impact of nearly $5 million from negative currency translations and $40-$50 million from COVID-19. Meanwhile, it anticipates comps to be down mid-single digits, indicating the estimated adverse impact from COVID-19 of roughly 600 bps.
The company expects a gross margin decline of 100-150 bps in the fiscal first quarter compared with the year-ago quarter’s reported level of 60.5%. This will likely include adverse impacts of 50 bps from currency and China tariffs as well as about 100 bps impacts from COVID-19.
Abercrombie expects operating expenses (excluding other operating income) to remain flat or increase around 2% from adjusted operating expenses of $475 million reported in first-quarter fiscal 2019. It anticipates effective tax rate to be in the upper 20s.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -82.51% due to these changes.
Currently, Abercrombie has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Abercrombie has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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