The Same Old Story
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Abercrombie & Fitch (NYSE: ANF) is a company that I've followed for quite a while. Years ago I owned shares primarily based on the idea that the stock was relatively cheap compared to its growth rate. I also purchased shares in American Eagle (NYSE: AEO) for much the same reason. The difference back then was, American Eagle had fairly consistent positive comparable sales growth, while Abercrombie & Fitch struggled with negative comps. Unfortunately for Abercrombie & Fitch investors, this earnings report shows much of the same.
While overall sales increased 4%, EPS decreased a staggering 45.71%. You can clearly see that the company is struggling by looking at each division’s comparable sales. The Abercrombie & Fitch division showed comparable sales down 11%, Hollister showed comps. down 10%, and Abercrombie kids also showed comps. down 10%. The company's domestic sales clearly show that the company's merchandising is wrong as overall sales dropped 5%. This is particularly troubling when you consider that competitor American Eagle showed overall sales increasing 11%. As proof that the strength in sales was not at just one of their competitors, consider that both The Gap (NYSE: GPS) and The TJX Companies (NYSE: TJX) reported sales increases of 9% each. With American Eagle, The Gap, Old Navy, Marshall's, and TJ Maxx all showing positive sales increases, an overall decrease at Abercrombie & Fitch shows a company specific issue. However, there were two bright spots for investors to keep their eyes on, the international division and the company's direct to consumer sales.
Abercrombie & Fitch international represents almost 32% of total revenue, and reported total sales up 31%. A consistent strength for the company has been their direct to consumer sales, which increased 25% in the current quarter. One thing that investors should be aware of is, the company's outlook shows one of great caution and potential trouble in the future. While international sales growth could lead to better results in the future, the company's finances may not allow for expansion.
Abercrombie & Fitch saw several challenges pop up in just the last few months. The first, was the company's gross profit margin dropped from 63.6% last year to 62.5% this year. Secondly, the company's store and distribution expense increased 7.7%, and was a large contributing factor to lower earnings. In the past the company's repurchase shares, and diluted shares are down 7.65% versus last year. However, in the current quarter no share repurchases were made. The company's outlook for the remainder of the year should give investors pause. Not only is Abercrombie & Fitch calling for comparable sales to decline 10%, but they are also decreasing the number of Hollister store openings from 40 down to 30. The most troubling is the company's statement that it sees, “a reduced run rate for future international chain store openings.” Since international sales have been so much stronger than domestic sales, a reduced opening rate can only lead to reduced results in the future. This is why I said earlier that Abercrombie & Fitch is telling investors the same old story. Unless the company's financial results improve, there are multiple better opportunities.
Investors should be careful to not make the same assumptions about Abercrombie & Fitch that I did years ago. Though analysts are calling for 17.32% earnings per share growth, based on the company's guidance this seems unlikely at least in the short term. Some investors might point at Abercrombie & Fitch's dividend yield of nearly 2% as a reason to wait out the company's current challenges. However, negative free cash flow and the lack of share repurchases, makes me question the sustainability of the current dividend. By comparison, their competition looks in much better shape. American Eagle for instance, pays nearly the same yield and is free cash flow positive. Though the company is expected to grow earnings at about 12%, this number seems at least realistic. The Gap also could represent a good opportunity as the company has reinvigorated its name brand and Old Navy stores. The company also generates even more free cash flow per $1 sales than American Eagle. Another possibility would be The TJX Companies, as increasingly budget conscious shoppers are likely to continue frequenting their Marshall's and TJ Maxx chains. While the stock is relatively more expensive than either American Eagle or The Gap, The TJX Companies has been a more consistent performer. With all of these other opportunities available, I can't imagine why they would listen to the story that Abercrombie & Fitch is telling.
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