Abercrombie & Fitch (ANF) Surges on Strong Third Quarter Earnings

Shares of apparel retailer Abercrombie & Fitch (ANF: Charts, News) surged nearly 30% yesterday after the company, which has lagged its industry peers American Eagle Outfitters (AEO: Charts, News) and Aeropostale (ARO: Charts, News), reported robust third quarter earnings that topped analyst estimates.

New Albany, Ohio-based Abercrombie reported earnings of 87 cents per share, or $71.5 million, on revenue of $1.17 billion. This was a 40% improvement in earnings and 9% increase in sales from the prior year quarter, which handily topped analyst expectations of 60 cents per share on revenue of $1.11 billion. Abercrombie's strong revenue growth was fueled by overseas sales growth of 37% to $351.1 million, which offset flat U.S. sales of $818.6 million during the quarter. Daily Chart
Up to Tuesday, Abercrombie's stock has been one of the worst performing apparel retailers of the year, sliding 36% year to date, while American Eagle's stock rose 28% and Aeropostale dropped 14%. Although Abercrombie has recovered much of its prior losses, the stock still trades far below its 52-week high of $56.92. Same-store sales slid 3%, with a 4% drop at its Abercrombie & Fitch namesake stores and a 1% dip at Hollister. Analysts had projected a drop of 7% or higher. Gross margin increased by 2.4 percentage points to 62.5%, while inventories dropped 21%. Store and distribution expenses were also lower, dropping slightly from 42.9% of total sales to 42.5%. Both same-store sales and margins exceeded analyst expectations, which led the company to raise its full-year profit outlook to a range between $2.85 to $3 per share, up from its previous guidance of $2.50 to $2.75 per share. Same-store sales are expected to remain negative, although in the "mid-single digits." Since Abercrombie stock was heavily shorted over the past year, analysts expect a moderate rally as shorts cover. UBS analyst Roxanne Meyer noted, "The stock will likely rally strongly as shorts cover and others pile-in." However, Meyer remained cautious of the company's long-term growth potential, stating, "While we are encouraged by the improved trend in (comparable sales) and margins, we remain neutral as we seek clarity in improving fashion and plans for growth from here/curbing cannibalization." Other analysts were unsure if Abercrombie could maintain its brand appeal with its "preppy fashions," which may be outdated for today's teen and college students demographic. Some analysts believe that Abercrombie needs to significantly refresh its product line to compete with brands focused on a younger demographic, such as H&M and Forever 21. Abercrombie recently announced the acquisition of online shoe and clothing retailer GoJane.com, which could help it diversify its products and increase its e-commerce sales. Shares of Abercrombie trade at 13 times forward earnings with a 5-year PEG ratio of 0.78, which means the stock is fundamentally cheap with strong growth potential. However, the company faces strong growth headwinds, with the questionable appeal of its main product lines as well as fickle consumer sentiment in the United States. Higher taxes and an upcoming fiscal cliff are also putting enormous pressure on the retail apparel sector. Abercrombie's stock pays a quarterly dividend of 17 cents per share - a 1.76% yield at current prices. Other News About ANF Abercrombie & Fitch Profit Rises 40% Abercrombie reports a surprising surge in both top and bottom lines. A&F's Shares Surge on Strong 3Q Report Abercrombie gets a big boost after its third quarter earnings report. Other Stocks in the News Cisco Bounces Back on Earnings Surprise Cisco briefly carries the tech sector higher on positive earnings. Whole Foods at Half Price? Is Whole Foods getting too cheap to ignore? Copyright 2012 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA InvestorGuide.com, Inc.) or its employees responsible.

Published on Nov 15, 2012
By Leo Sun
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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