Abercrombie & Fitch Co
ANF
has been witnessing improvements in sales trends, driven by its brand strength. This led to a solid third-quarter fiscal 2022, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. Management remains encouraged about the holiday season amid the dynamic environment.
Speaking about brand strength, Abercrombie witnessed sales growth of 10% for the Abercrombie brand to $422.3 million. Also, the metric rose 13% on a constant-currency basis on the back of strength in Abercrombie adults. Compared with the pre-pandemic level of 2019, sales at the Abercrombie brand advanced more than 20%. Management remains optimistic about the upcoming holiday season, driven by the continued momentum at Abercrombie and healthy inventory levels.
The company noted that average unit retail (AUR) improved for the 10th straight quarter in the fiscal third quarter, with the Abercrombie brand performing well. AUR gains can be attributed to reduced promotional activity and higher tickets.
Abercrombie is progressing well with its store rationalization by reducing its dependence on underperforming tourist-driven locations. As part of the plans, Abercrombie intends to reposition larger-format flagship locations to smaller omni-channel-enabled stores.
Progressing on these efforts, the company permanently closed 228 locations, representing 1.5 million productive gross square feet of its store base in fiscal 2021. In the third quarter of fiscal 2022, the company opened 19 stores, including 11 Hollister and eight Abercrombie stores. It closed one Hollister and Abercrombie store each.
The company intends to open 60 stores in fiscal 2022. Out of this, ANF opened 31 stores in the fiscal third quarter and the remaining 29 are likely to be opened in the fiscal fourth quarter. It also reiterated its target of closing 30 stores this year.
Abercrombie remains on track with its 2025 Always Forward plan that focuses on brand growth, leveraging its omnichannel capabilities, and expanding digital penetration and financial discipline. As part of this plan, the company provided a financial outlook for fiscal 2025 and a long-term view. It anticipates annual revenues of $4.1-$4.3 billion and an annual operating margin rate of 8% or more by the end of fiscal 2025.
For the long term, management expects annual revenues of $5 billion and an annual operating margin rate of 10% or more. ANF intends to accelerate its digital revolution via Knowing Their Customer Better and Wowing Them Everywhere initiatives. Also, increased investment in customer analytics to meet and outpace customer demand bodes well.
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Driven by these factors, shares of this Zacks Rank #3 (Hold) company jumped 50.9% year to date compared with the
industry
’s growth of 7.1%.
Headwinds to Overcome
Despite such upsides, Abercrombie continues to reel under a tough global macroeconomic landscape and weakness in its Hollister brand, stemming from inflation. It also witnessed a dismal year-over-year performance in the fiscal third quarter.
For fiscal 2022, ANF expects net sales to dip 2-3% from the year-ago period’s reported figure of $3.7 billion. For the fourth quarter of fiscal 2022, management envisions a net sales decline of 2-4% from the fourth-quarter fiscal 2021 reported level of $1.2 billion.
Also, elevated raw material and freight costs dented the margins. In third-quarter fiscal 2022, the gross margin contracted 450 bps to 59.2%. The adjusted operating income was $21 million compared with $79 million in the year-ago period. Adjusted operating expenses were $501 million, up from the prior-year quarter’s $498 million due to higher digital fulfillment expenses, offset by lower marketing, incentive-based compensation and foreign currency. As a percentage of sales, operating expenses of 57.2% rose 140 bps from 55.8% in the prior-year quarter.
Unfavorable foreign currency is concerning. The company’s top and bottom lines were hurt by unfavorable currency impacts of 300 bps and 10 cents, respectively. Also, the gross margin in the said quarter reflects 60 bps of an adverse currency impact.
For fiscal 2022, the sales outlook assumes a negative impact of 250 bps of currency movements. Also, the sales view for the fiscal fourth quarter includes a 300-bps impact from adverse currency rates. The current uncertain environment is predicted to linger in the back half of fiscal 2022.
Conclusion
All said, we hope that Abercrombie’s brand strength, store-optimization efforts and other growth strategies are likely to help offset currency and cost woes. A
Value score
of B reflects its inherent strength.
Stocks to Consider
Here are three better-ranked stocks to consider, namely
Wingstop
WING
,
Ross Stores
ROST
and
Chipotle Mexican Grill
CMG
.
Wingstop currently sports a Zacks Rank #1 (Strong Buy). WING has a long-term earnings growth rate of 11%. Shares of WING have declined 9.2% in the past year. You can see
the complete list of today’s Zacks #1 Rank stocks here
.
The Zacks Consensus Estimate for Wingstop’s 2023 sales and EPS suggests growth of 18.1% and 16.4%, respectively, from the year-ago period’s reported levels.
Ross Stores, an off-price retailer of apparel and home accessories in the United States, currently sports a Zacks Rank #1. ROST has an expected EPS growth rate of 10.5% for three to five years.
The Zacks Consensus Estimate for Ross Stores’ current-year sales and EPS suggests declines of 1.6% and 11.7%, respectively, from the year-ago period’s reported figures. ROST has a trailing four-quarter earnings surprise of 10.5%, on average.
Chipotle Mexican Grill, an operator of fast-casual restaurants, currently carries a Zacks Rank of 2. CMG’s expected EPS growth rate for three to five years is 23.4%.
The Zacks Consensus Estimate for Chipotle Mexican Grill’s current financial-year revenues and EPS suggests growth of 15.2% and 30.8%, respectively, from the year-ago reported figures. CMG has a trailing four-quarter earnings surprise of 4.1%, on average.
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