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Abercrombie & Fitch (ANF) Beats Earnings But Same-Store Sales Drag Down Revenue

By: , dated August 17th, 2012

Shares of apparel retailer Abercrombie & Fitch (ANF: Charts, News) rallied nearly 9% on Wednesday after the company reported earnings that topped Street estimates, although revenue came in below forecasts. For its second quarter, Abercrombie reported earnings of 19 cents per share, or $15.52 million, a steep drop from the 35 cents per share, or $32.03 million, it posted in the prior year quarter. However, this still topped analysts’ expectations of 17 cents per share. Revenue rose 4% to $951.41 million, which came up short of forecasts of $993.98 million. Despite the rally, Abercrombie stock has had a brutal year, plunging nearly 50% over the past twelve months due to sluggish domestic and international growth.

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CEO Mike Jeffries also remained downbeat regarding the company’s modest beat. “The second quarter results we are reporting today are disappointing and below our expectations coming into the quarter,” he stated. “In particular, we saw a further deceleration in the trend in our international stores, while our U.S. chain stores also comped negatively for the quarter for the first time since 2009.” Looking ahead, the company expects full-year earnings of $2.50 to $2.75 per share, in line with Wall Street expectations of $2.56 per share. However, this was a decrease from the $3.50 to $3.75 per share it had previously forecast during its first quarter earnings. Abercrombie attributed the weakened guidance to an expected same-store sales decline of 10% in the second half of the year, exacerbated by a stronger U.S. dollar and increased taxes.

Across the company, same-store sales declined 10%. Its flagship Abercrombie & Fitch stores declined by 11%, Abercrombie Kids slid by 10%, while Hollister dropped by 10%. Abercrombie & Fitch generated $362.5 million in sales, Abercrombie Kids brought in $76.3 million while Hollister was the largest earner at $485.6 million. U.S. sales slid by 5% to $648 million, but international sales climbed 31% to $303.4 million. Total direct-to-consumer sales increased 25% to $127.7 million.

In 2012, Abercrombie expects to add 30 new international Hollister locations, up from its previous forecast to lose 40 stores. The company expects to postpone several new international flagship stores, but still plans to open its new Shanghai flagship store. Over the next few years, the company plans to close 180 stores in the United States, adding to the 135 underperforming stores it has closed over the past two years.

The company boosted its existing share buyback program by ten million shares, for a total of 22.9 million shares. It also declared a quarterly dividend of 17.5 cents per share. However, this may not be enough to appease investors who have held Abercrombie stock on the way down. Shares of Abercrombie trade at 11 times forward earnings with a 5-year PEG ratio of 0.8. The stock is fundamentally cheap, but faces macro headwinds that could derail its growth at home and abroad.

Despite rough times ahead, many analysts believe that the worst is behind the company. Analysts at Wedbush upgraded Abercrombie from Neutral to Outperform, raising its price target from $30 to $45. Wedbush analysts noted that the company’s margins and sales were stabilizing, while inventories were declining. Susquehanna analysts also agreed, raising its price target from $43 to $48.

Other News About ANF
Abercrombie’s Profit Sinks as Fashions Evolve
Abercrombie beats earnings, but revenue comes up short.
Abercrombie & Fitch Q2 Profit Tops Estimates
Abercrombie shares rally; investors believe that the worst may be over.

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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