Abercrombie Stock Up 51% in a Year: Will the Rally Continue?

Abercrombie & Fitch Co. ANF is performing impressively, backed by its robust growth strategies. Moreover, the company has been gaining from strategic capital investments, cost-saving efforts as well as effective loyalty and marketing programs. Its solid surprise history is boosting the investors’ sentiments as well.

In a year’s time, shares of this leading premium apparel retailer have surged a whopping 50.7%, outperforming the industry’s 28.6% rally. Also, this Zacks Rank #3 (Hold) company's VGM Score of A with an expected long-term earnings growth rate of 15.3% clearly demonstrates its growth potential.

Key Catalysts

Abercrombie’s smooth progress on expanding digital presence along with growth of direct-to-consumer and omni-channel capabilities is commendable. The company’s investments in mobile, omni-channel and fulfillment have significantly boosted its direct-to-consumer business. Notably, DTC sales surged 16% in second-quarter fiscal 2018. Overall, the DTC business accounted for nearly 26% of net sales in the quarter, reflecting 11% increase in comp sales. In fiscal 2018, management plans to continue investing in DTC capabilities besides bringing innovations in this channel using customer insights and data analytics.

Meanwhile, the company is aggressively expanding Hollister stores in the new markets, while simultaneously closing underperforming U.S. chain stores to drive top-line growth. In the fiscal second quarter, the company shuttered three outlets in the United States, and introduced one Hollister store and three namesake stores — comprising one domestic and two international locations — in the country.  In fiscal 2018, Abercrombie plans to introduce 22 full-price stores, including 13 Hollister and nine Abercrombie stores. Simultaneously, it plans to shut down nearly 60 stores in the United States, through natural lease expirations.

Further, the company is gaining from consistent positive momentum for the Hollister brand, courtesy of solid sales growth across all channels and geographies. Notably, the brand delivered seventh straight quarter of comps growth in the reported quarter. Impressively, Hollister is gaining from positive customer response to product innovations, emerging categories and overall customer experience. In fiscal 2018, it plans to provide roughly 70 engaging customer experiences through new prototypes, rightsizing and remodels besides closing of unproductive stores.

Additionally, Abercrombie has a healthy balance sheet, which provides it with ample financial flexibility to drive growth and increase shareholder-friendly moves. Recently, the company paid a quarterly cash dividend of 20 cents per share. Further, it bought back roughly 1 million shares for nearly $25 million in the fiscal second quarter. Currently, the company has about 4.8 million shares remaining to be purchased under its current authorization. For fiscal 2018, Abercrombie expects liquidity to be strong.

Quarterly Performance & Outlook

Abercrombie maintained its fifth straight positive earnings streak in second-quarter fiscal 2018. Although sales lagged estimates in the quarter after five consecutive beats, both top and bottom line improved on a year-over-year basis. The bottom line was driven by an increase in comparable store sales (comps), gross margin expansion and lower expenses, which reflects the company’s successful execution of plans. Foreign currency tailwinds also aided results. As a result, management reiterated its fiscal 2018 view.

While sales are expected to be up 2-4% in fiscal 2018, currency movements are expected to serve as a headwind to the tune of nearly $15 million in the second half of the fiscal year. Consequently, sales are anticipated to be nearly flat year over year for the fiscal third quarter, including foreign currency and calendar shift impacts, down from 5% growth registered in the year-ago quarter. Additionally, GAAP operating expenses are now expected to increase nearly 2.5% from $2 billion adjusted operating expenses recorded in fiscal 2017. The company had earlier projected a 2% increase.

Nevertheless, Abercrombie’s customer-centric approach, efforts to strengthen brands and focus on transformation endeavors are likely to help the company achieve its targets for fiscal 2018. Moving ahead, it remains keen on improving customer experience by investing in loyalty programs, stores, direct-to-consumer and omni-channel capabilities. We believe these robust initiatives should drive the stock higher.

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