Abercrombie & Fitch: Zacks’ Bear of the Day Play

The traditional brick and mortar retail apparel environment continues to face significant headwinds from online companies like Amazon.  These online companies are taking a larger portion of the total market share each quarter and forcing the traditional stores to make drastic cuts to store counts, inventory, and headcounts.  Further, if the traditional company misses a hot style, a new trend, or a seasonal category, they can see their top lines go into free fall.  These are some of the issues facing our Zacks Bear of the Day, Abercrombie & Fitch (ANFFree Report) .

This Zacks Rank #5 (Strong Sell) company is principally engaged in the purchase, distribution and sale of men’s, women’s and kids’ casual apparel. The company’s retail activities are conducted under the Abercrombie & Fitch and Abercrombie trade names through retail stores, a catalogue, a magazine/catalogue and a website, all bearing some form of the company name. Merchandise is targeted to appeal to customers in specialty markets who have distinctive consumer characteristics.

Recent Earnings Performance

The company posted year over year losses in net sales -6% with declines in net sales for Abercrombie -13% and Hollister -1%, domestic net sales -7%, international net sales -5%, and operating income -52.2%.  On the positive, management did declare a quarterly dividend of $0.20 per share during the quarter.

Management’s Take

According to Arthur Martinez, CEO, “For A&F, flagship and tourist locations continued to be a major headwind. In addition, chain store traffic patterns remained negative. Weakness in A&F was compounded by underperformance of seasonal categories, which ultimately led to pressure on gross margin. While we anticipate the A&F business will remain challenging through the balance of the fiscal year, we continue to move aggressively to evolve the brand across all channels through significant changes in product, customer experience and marketing. A comprehensive set of strategic and operational actions is being taken by an experienced team under new leadership, and we expect to see benefits as our efforts gain traction.”

Price and Earnings Consensus Graph

As you can see in the graph below, both ANF’s stock price and future earnings outlook have been declining for several years.

ABERCROMBIE Price and Consensus

ABERCROMBIE Price and Consensus | ABERCROMBIE Quote

Declining Estimates

Due to the issues at their flagship Abercrombie & Fitch stores and tourists locations earnings estimates for Q4 16, Q1 17, FY 16 and FY 17 have all seen downgrades over the past 30 days.  Q4 16 dropped from $1.08 to $0.80, Q1 17 fell from -$0.54 to -$0.58, FY 16 plummeted from $0.44 to -$0.01, and FY 17 declined from $0.71 to $0.28.

Bottom Line

Negative chain store traffic patterns, and the difficulty of moving seasonal items once again accounted for the quarterly miss.  But on the positive side direct to consumer and omnichannel sales accounted for 23% of total company sales, a 2% increase from last year’s numbers.  This concentration on online sales is commendable, but it needs to be much more robust to compete with the likes of Amazon.

If you are inclined to invest in the retail/apparel/shoes segment, you would be best served by looking into Tillys Inc. (TLYSFree Report) , Zumiez Inc. (ZUMZFree Report) , and or Children’s Place (PLCEFree Report) , all of which currently carry a Zacks Rank #1 (Strong Buy).

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