Abercrombie & Fitch Co. (ANF) registered earnings of $1.38 per share in the fourth quarter of fiscal 2010, thereby surpassing the Zacks Consensus Estimate of $1.32 per share and handily beating the prior-year net income of 91 cents per share.
The teen retailer’s strong results primarily emanated from the company’s strategy of price cuts and promotions, which boosted top-line growth. On a GAAP basis, the company reported earnings per share of $1.03 versus 53 cents earned in the prior-year quarter.
For the full year, the company reported earnings per share of $2.05, ahead of the Zacks Consensus Estimate of $1.98 per share and prior-year earnings of $1.12 per share. The company reported GAAP earnings $1.67 per share compared with break-even results in the same period last year.
Result Summary
Abercrombie reported double-digit net sales growth of 23% in the reported quarter, climbing to $1,149 million from $936 million in the prior-year period. The growth reflected a 16% increase in domestic net sales to $919 million and a robust 61% surge in international net sales to $230.3 million. Overall, comparable-store sales rose 13%.
Direct-to-consumer merchandise sales jumped 43% to $133.4 million in the reported quarter, reflecting continuing strength in this channel. Comparable-store sales at brands Abercrombie & Fitch and abercrombie kids rose a respective 13% and 9%. Hollister Co. also reported a comparable-store sales growth of 13.0% in the quarter. Total revenue marginally beat the Zacks Consensus Estimate of $1,141.0 million.
Gross profit increased 22.9% to $730.9 million while gross margin expanded 10 basis points to 63.6%.
Stores and distribution expenses, as a percentage of sales, declined to 42.2% from 44.2% in the prior-year period helped by a fall in store occupancy costs and payroll costs. Conversely, higher compensation and benefits resulted in an increase in marketing, general and administrative expenses, which climbed 15.0% to $106.4 million in the quarter under review.
Operating income for the quarter increased $49.3 million to $144.7 million versus $95.4 million in the same quarter last year. Operating margin expanded 240 basis points to 12.6%.
Balance Sheet
Abercrombie ended the quarter with cash and cash equivalents of $826.4 million and shareholders’ equity of $1,890.7 million. Long-tem debt for the period came in at $68.6 million.
In the quarter under review, the company repurchased 0.9 million shares of its common stock at a price of $47.0 million. In fiscal 2010, the company bought back 1.6 million shares at a cost of $76.2 million. As of January 29, 2011, the company had approximately 9.8 million shares available for purchase under its publicly announced stock repurchase authorizations.
Expenditure of $118 million on new stores, store refreshes and remodels coupled with a further $43 million investment in information technology led to a total capital expenditure of $161 million in fiscal 2010.
Store Update
In fiscal 2010, the company started operation of a total of 36 new stores, consisting of 12 domestic stores and 24 stores in overseas markets. Abercrombie shuttered 64 stores.
Brief Peek Into 2011
The company expects to incur capital expenditure of $300 million for fiscal 2011. A portion of the cash will most likely fund a slew of new-store openings. Moving forward, the company expects to open 30–40 international mall-based Hollister stores. The company also looks forward to close 50 domestic stores in fiscal 2011.
In Conclusion
Abercrombie operates in a highly fragmented market and competes with national as well as regional players. The company besides competing with larger retailers like Gap Inc. (GPS) also has to contend with value-priced specialty retailers of the like of Aeropostale Inc. (ARO).
Abercrombie currently retains a short-term Zacks #3 Rank (Hold). Though cognizant of the rising retail market, we are also conscious of steep competition in this space. Hence, in the balance, we maintain a long-term Neutral recommendation on the company.
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