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Abercrombie Results Fall Short of Expectations

Written by on May 27, 2013

The competitiveness of the teen apparel industry was apparent in Abercrombie’s ANF first-quarter results today, with both the top and bottom lines falling short of investor expectations. The continuous discounting to attract a cautious consumer in order to drive traffic persisted, impairing any pricing power Abercrombie could wield and reinforcing the view that the company lacks an economic moat. Abercrombie is not out of the danger zone yet, and analysts expect the remainder of the year to result in weak performance (in line with management’s guidance).

With shares trading below $50 this morning (down more than 10%), there could be more downside risk in the stock and would wait to initiate a position. While it wasn’t surprising that management did not address some of the negative media press surrounding an old video clip of the company’s CEO that resurfaced recently, this could weigh on the brand image in the near term.

Management mishaps aren’t rare at Abercrombie, and investors are beginning to wonder when the board will decide that experience no longer trumps brand image. Not all press is good press. Brand image may already not be resonating as well with customers as it has in the past, as evidenced by management’s downward revision to fiscal 2013 earnings per share guidance to $3.15 to $3.25 per share (from $3.35-$3.45) and the first-quarter comparable store sales decline in the low-single-digit range. This is lapping low-single-digit comp declines for the prior-year period.

The first quarter fell short of expectations on both top and bottom lines. Total revenue declined 9% to $839 million, affected by total comparable store sales falling 15%. This was composed of a comp decline at the stores of 17% and online of 6%, which some analysts found shocking. E-commerce has been a source of strength at almost all of the other major apparel retailers.

Management offered that sales were weaker because of delayed deliveries throughout the quarter and that weather affected sales both domestically and internationally, but the brand’s troubles resonating with customers was at play. The gross margin rate expanded 720 basis points year over year, to 65.9%, helped by better mix and lower product costs (cotton). Operating expenses contracted slightly year over year with lower payroll and maintenance and incentive compensation.

While management is taking the right strategic steps to improve the business, these plans could take time to bear fruit. To refresh, the firm is working on profit improvement through a detailed review of existing processes covering multiple work streams (marketing, supply chain, etc) and has recently completed the diagnostic phase of some non-merchandise segments which represent 30% of the total addressable costs (and expected to drive annual savings of $35 million to $55 million). In addition, there is an AUR optimization initiative, which is a fancy way to say the company is working on getting the best price for its products, something that all retailers should already be doing.


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