Abercrombie & Fitch Co. ANF has been gaining from the continued momentum in the Abercrombie brand and sequential improvement in the Hollister brand. The apparel retailer undertook efforts to improve its inventory across all labels, thereby attracting customers to shop for a diverse range of products like dresses and cargo. Also, strategic investments across stores, digital and technology via its Always Forward Plan bodes well.
This led to impressive first-quarter fiscal 2023 results, wherein the bottom and top lines surpassed the Zacks Consensus Estimate. Adjusted earnings of 39 cents per share in the first quarter increased 44.4% from the year-ago period’s 27 cents. Net sales of $836 million rose 3% year over year. Net sales grew 4% on a constant-currency basis.
Its gross margin expanded 570 bps to 61% driven by 760 basis points from lower freight costs and 230 basis points from robust AUR growth, partly offset by 320 basis points from higher cotton and raw material costs, and 100 basis points from the adverse currency. Also, the adjusted operating income was $38.4 million against a loss of $6 million in the year-ago period.
The company is working toward rationalizing its store base by reducing dependence on underperforming tourist driven locations. As part of its store optimization plans, Abercrombie plans to reposition larger format flagship locations to smaller omni-channel enabled stores. Progressing on these efforts, the company opened six stores, including three Hollister and Abercrombie stores each in the fiscal first quarter. It closed seven Hollister and three Abercrombie stores.
ANF remains on track with its 2025 Always Forward plan focuses on brand growth, leveraging its omnichannel capabilities, and expanding digital penetration and financial discipline. As part of this plan, the company earlier provided a financial outlook for fiscal 2025 and a long-term view. It anticipates annual revenues of $4.1-$4.3 billion and an annual operating margin rate of 8% or more by the end of fiscal 2025. For the long term, management expects annual revenues of $5 billion and an annual operating margin rate of 10% or more.
The company also predicts the Abercrombie & Fitch and abercrombie kids brands to deliver a 6-8% sales CAGR over the next three years, with Hollister and Gilly Hicks brands likely to generate a flat-to-2% and 15% sales CAGR. Notably, Abercrombie & Fitch adults are forecast to be the major driver.
Also, Abercrombie intends to accelerate its digital revolution via Knowing Their Customer Better and Wowing Them Everywhere initiatives. Increased investment in customer analytics to meet and outpace customer demand bodes well. Lastly, it plans to generate at least $600 million of free cash flow in the next three years to deliver healthy shareholder returns, and drive omnichannel growth across digital and physical stores.
Driven by these factors, management envisions fiscal 2023 net sales to grow 2-4% year over year, up from the prior guidance of 1-3% growth. It expects the Abercrombie brand to outperform Hollister. Region-wise, the United States is likely to outperform International. Also, fiscal 2023 includes a 53rd week, which is estimated to benefit sales by $45 million. Abercrombie expects an operating margin of 5-6%, up from the earlier stated 4-5%. This includes gains of 250 bps from reduced freight and raw material costs, somewhat offset by inflation and increased operating expense investment for the 2025 Always Forward Plan initiatives.
For second-quarter fiscal 2023, the company expects sales growth of 4-6%. The operating margin is envisioned to be 2-3% compared to breakeven in the prior-year quarter. This is likely due to lower freight and raw material costs, partly offset by a marginal decline in the operating margin from inflation and increased operating expense investment for the 2025 Always Forward Plan initiatives.
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Consequently, shares of this Zacks Rank #1 (Strong Buy) company gained 22% in the past three months against the industry’s decline of 13.8%.
All said, we hope that Abercrombie’s brand strength, store optimization efforts and other growth strategies are likely to aid growth further. Notably, the earnings estimate for the current financial year have increased 32.9% to $1.90 over the past seven days. Topping it, a VGM Score of A reflects its inherent strength.
Other Stocks to Consider
Some other top-ranked stocks that investors may consider are Tecnoglass TGLS, Kroger KR and TJX Companies TJX.
Tecnoglass manufactures and sells architectural glass and aluminum products for the residential and commercial construction industries. TGLS currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Tecnoglass’ current financial-year sales and earnings per share suggests growth of 18.1%
and 23.8%, respectively, from the year-ago reported figures. TGLS has a trailing four-quarter earnings surprise of 22.7%, on average.
Kroger, a renowned grocery retailer, currently carries a Zacks Rank of 2 (Buy). KR has a trailing four-quarter earnings surprise of 9.8%, on average.
The Zacks Consensus Estimate for Kroger’s current financial year’s earnings per share suggests growth of 6.6% from the year-ago reported figure. KR has an expected earnings per share growth rate of 6% for three to five years.
TJX Companies, which operates as an off-price apparel and home fashion retailer, carries a Zacks Rank #2. The expected EPS growth rate for three to five years is 10.5%.
The Zacks Consensus Estimate for TJX Companies’ current financial-year sales and earnings suggests growth of 6.4% and 14.5%, respectively, from the year-ago period. TJX has a trailing four-quarter earnings surprise of 4.4%, on average.
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