I had mentioned here a few days back that Abercrombie & Fitch (ANF, Financial) and Aeropostale (ARO, Financial) continue to struggle against American Eagle Outfitters (AEO, Financial), which has bounced back with a bang. Abercrombie’s dismal first-quarter fiscal 2015 results show that it is not out of the woods yet. The teen retailer missed both top- and bottom-line estimates, and numbers have gone from bad to worse. The stock has lost around 28% year-to-date and around 45% in past year.
First-quarter numbers
Comparable-store sales took a beating at both the brands, with Abercombie and Hollister declining 9% and 6% year-over-year, respectively. These two brands generated revenues of $340 million and $369 million, respectively. In addition, negative impact of currency translation headwinds further added to the woes.
As a result of adverse currency headwinds and 8% year-over-year consolidated decline in comps, total revenue declined 14% year over year to $709.4 million, missing analysts’ estimate by over $21 million.
Adjusted loss per share came in at $0.53 versus $0.17 in the year-ago quarter, missing consensus estimate by $0.19.
Abercrombie exited the quarter with cash and cash equivalents of $383.2 million, debt of $298.5 million and shareholders’ equity of $1,307.3 million.
Journey ahead
During the earnings call, the execs spent more time talking about the future plans than defending the past, as has been the case in earlier quarters also.
The comp has continued to improve in May and the company is confident of posting sequential improvements as the year progresses. Management agreed that turnaround isn’t going to happen overnight and expects to stabilize the business this year.
Abercrombie will be closing underperforming stores and opening new stores in high-performance areas. During the first quarter it shuttered 13 domestic stores and opened three stores each, in the U.S. and globally. During fiscal 2015, Abercrombie will open about 17 full-price international outlets and 5 North American full-price outlets, while shuttering 60 domestic stores due to lease expiry.
In its quest for omnichannel growth, the retailer has enabled order in-store in all U.S. stores and will have ship-from-store in about 70% of U.S. stores by the end of Q2. The same will be extended to stores in Canada and U.K. by the end of fiscal 2015.
Abercrombie is also trying to expand the reach of the brand through licensing, franchising and wholesaling arrangements. This model will let the company to expand the reach of the brands with low capital investment.
Looking ahead
Currency headwinds are expected to continue during the entire fiscal year. The retailer expects sequential improvement in comps during the second quarter and back half of the fiscal year. Gross margin is expected to remain flat or increase marginally and operating expenses are expected to decline by about $140 million.
Final take
Abercombie continues to struggle and currency headwinds have also made things tough for the teen retailer. It has been trying to turn around though organizational restructuring, digital initiatives and store optimizations, but nothing seems to be going its way as far as results are concerned. Its losses have widened and sales have declined versus the year-ago period.
Hence, investing in this stock is like catching a falling knife. It is better to stay away from the stock, unless you have a high appetite for risk.
