Today’s news: Abercrombie & Fitch (ANF) reports first-quarter 2019* results; moved from Buy to Hold.
Shares of Abercrombie & Fitch (ANF – yield 4.2%) are down dramatically today subsequent to reporting first-quarter 2019 results. I listened to the hour-long first-quarter webcast, which is more time-consuming than it sounds because there’s a lot of pausing of the webcast while taking notes and doing other research.
Despite the share price drama, Abercrombie seems completely on track toward its multi-year goals of improving revenue, profits, expense-control, data analytics and global store expansion. I spent several years in my 20s working in sales at the Liz Claiborne fashion showrooms in New York. I’m familiar enough with the wholesale and retail apparel business to comprehend the lingo and nuances of the industry’s potential successes and failures. I heard nothing on today’s conference call that would indicate trouble brewing at Abercrombie & Fitch. I remain confident in their business strategy.
First-quarter revenue of $734 million came in a fraction above consensus estimates (January year end), with total comparable store sales (comps) up 1%—the seventh consecutive quarter of total positive comps—vs. the consensus estimate of 1.33%. U.S. comps rose 4% due to the strong U.S. economy, despite soft tourism associated with the strong U.S. dollar. Many other U.S. retailers reported negative weather effects during the quarter, but Abercrombie did not report any such impact, and in fact achieved record quarterly revenue in both guys’ outerwear and girls’ swimwear.
Comps declined in Europe and Asia. Politics and the economy are affecting European sales, and the company confessed to missing an opportunity to maximize revenue during certain Chinese retail/holiday events in the first quarter.
The first-quarter loss per share was ($0.29) vs. the consensus estimate of ($0.43). Sluggish demand for Hollister apparel impacted the quarter, though comps were still up 2%, reflecting Hollister’s 10th consecutive quarter of positive comps.
Management expects second-quarter total net sales to be flat to up 2%, which is lower than the consensus estimate of 2.8%.
Full-year revenue and profit projections remain unchanged vs. previous guidance. The company anticipates full-year 2019 revenue rising 2%-4%. Comps, which rose 3% last year, are expected to rise in the low-single digits this year. Gross profits are expected to rise slightly vs. 60.2% last year.
A&F ended fiscal 2018 with 861 stores across brands. The company continues to invest in its global store base, while also remaining focused on increasing omnichannel sales, achieving over $1 billion in digital sales in 2018. For the quarter, digital sales grew to 30% of total revenue.
Abercrombie remains on track to deliver approximately 85 new experiences through new stores, remodels and rightsizes this year. The company has been methodically transitioning from large flagship stores toward smaller stores, often within the same markets. Current and recent flagship store closures include the Soho (NYC) Hollister store; the Milan, Italy and Fujuoka, Japan Abercrombie & Fitch stores in 2019 and 2020; and a Copenhagen store in 2018. These four stores were delivering below-company-average productivity, and represented less than 1% of total 2018 revenues. Additional flagship stores will be closed in the future, which should continue to improve comps and profitability as the transition progresses. Management sees significant opportunities within key European and Chinese markets, with long-term plans for additional expansion.
Management is very comfortable with inventory levels.
With regard to potential tariff problems, Abercrombie has been actively shifting production away from China for several years. The company sourced 20% of its apparel from China last year, and plans to be below 20% this year.
Prior to today’s report, Wall Street expected full-year profits to increase 25.2%, so clearly, there is no significant problem with Abercrombie’s operations or outlook. I’m moving the stock from Buy to a Hold recommendation while we wait for the share price to settle down. Hold.
*Since most retail companies will typically finish their fiscal years in January 2020, they usually refer to the current fiscal year as 2020. However, Abercrombie & Fitch refers to their current fiscal year as 2019.