The American retailer that focuses on casual wear for youngsters, Abercrombie & Fitch (ANF, Financial), had indicated in a press release earlier last month that there would be a whopping decrease in third-quarter sales as foot traffic in international markets was taking a severe hit on account of a sluggish economic environment in several of the regions. When the third-quarter results were released on December 3, the numbers came in similar lines with the given forecast and did disappoint several analysts and investors speculating the stock movement. Not only were the results dismal, but the future outlook is also not that bright as reflected through the guidance meted by the company’s management. Let’s get into the numbers directly for judging the key takeaways from the quarter earnings.
The mixed quarter results
The company released its third-quarter results ending on November 1 before the market opened on December 3, and the results were mixed when compared to analysts’ expectations. Revenue came at $911 million, down by a whopping 12% compared to the third quarter of the previous fiscal year. Such downturn in revenue was driven by comparable-store sales declining about 10% for the quarter, including a 14% dip at the stores and 8% growth in direct-to-consumer sales.
Adjusted earnings came at $0.42 a share or $30.4 million, while analysts were expecting earnings of $0.43 a share on $918.3 million in revenue. In fact, earnings also showed a massive dip from $0.52 a share reported a year earlier or $40.5 million.
Speaking about the quarter, Mike Jeffries, Abercrombie & Fitch’s CEO said, “Our third quarter results were disappointing in what remains a very challenging environment for young apparel... we expect conditions to remain difficult through the balance of the fourth quarter…”
Gross profit margins also recorded an 80 basis points decline in the quarter, falling to 62.2%, but cost reductions aided to partially offset this decline. During the quarter the company closed two net stores in the U.S. and added five new stores in international locations. Presently, the total store count in the U.S. stands at 834, while those in international locations have a count of 166. Year to date, the company has reported six net closures worldwide, bringing its total store count down to 1,000.
Declining sales has put the retailer into troubled waters
Management has cited a drastic fall in mall traffic, weak demand and deeper discounts as the major reasons behind the plunge in profits for the quarter. The worst decline was noticed in same-store sales which showed major declines in the months of September and October of the quarter slipping 10% while the analysts had expected a 9.1% decline during the quarter.
The retailer reported declining sales in all of its Abercrombie Kids, Abercrombie & Fitch and Hollister branded stores. Net sales according to brand were $385.4 million for the company’s flagship branded stores, with Abercrombie Kids, Abercrombie & Fitch and Hollister branded stores showing a sales decline of 10%, 6% and 12%, respectively. The management also does not seem to be optimistic, and they are expecting this sales downtrend to continue as conditions could become more difficult in the near future.
Cost-cutting measures becoming less effective
The company has indicated that to cope up with declining sales and to offset its effect to a limited extent, it will phase out visible logos on its clothing and offer trendier items. But analysts have opined that the company is just running out of options.
Eric Beder, specialty apparel analyst at Wunderlich Securities, notes that Abercrombie has already exhausted numerous turnaround strategies to no avail. The retailer has gone ahead and aggressively closed domestic locations, cut back on inventories, shifted away from logo products and cut costs to a considerable extent. But, nevertheless, the once-leading teen retailer is struggling to stay relevant since the surge in demand for fast-fashion brands like Forever 21 and H&M. This clearly reflects that the tastes of youngsters have changed rapidly, but the company has not been able to match the clothing to their likes at a similar pace.
Earnings guidance cut exercising caution
The apparel retailer wants to take a cautious stand and thus has reduced its guidance for the full year. Management how expects earnings to be in the range of $1.50-$1.65 per share, that is significantly lower to the average analyst estimate of $1.74 per share and much lower than the previous guidance of $2.15-$2.35 per share provided by the company.
The management has agreed that the young apparel sector in which the company chiefly operates is going through a period of disruption and turmoil, hence conditions would not revive soon and could remain difficult for the rest of the year.
Final word
The leading global specialty retailer is currently under stress as its financial playbook is under immense pressure with the rise of competition which it has not been able to cope with, and that’s the main reason why the traffic and sales have depleted rapidly at its stores. However, the retailer knows well what steps it needs to take to prevent the free fall in both its top and bottom lines. Though the company has laid a word of caution for the fiscal year earnings, in the longer term the company aims to achieve success by shifting to a branded structure, making apparent changes to the assortment, investing in omni-channel marketing, expanding internationally, closing under-performing stores and continuing the reduction of expenses. Hence, better days are surely in stock for the company though it’s facing the heat as of now which stands testified through the numbers posted in the third quarter.
