For a company supposedly at death's door, Abercrombie & Fitch (NYSE: ANF) is certainly showing a lot of life. The clothing retailer's third-quarter earnings report blew past analyst expectations on sales and profits.
While the results make it appear the retailer's turnaround strategy is taking hold, a closer look suggests Abercrombie & Fitch is still a sickly retailer and investors should hold off celebrating its resurrection for a bit.
Image source: Abercrombie & Fitch.
A low bar
The teen-clothing retailer reported net sales of $859 million, well ahead of the $819 million analysts were expecting, while adjusted earnings per share of $0.30 were 36% greater than Wall Street's prediction of just $0.22 per share. The gains came mostly as a result of comparable-store sales rising 4% year over year, well ahead of analyst predictions of only a 0.3% increase, and the first time since 2015 that Abercrombie & Fitch has posted a positive number.
Abercrombie CEO Fran Horowitz said in a statement announcing the results: "We are pleased by the clear progress across all brands, delivering another quarter of sequential comparable sales improvement, and a return to positive comparable sales. This sales performance in combination with disciplined expense management drove profit growth, despite the promotional environment."
Yet digging a little deeper into the numbers shows there is is still a cancerous tumor that needs to be removed before Abercrombie & Fitch can be given a clean bill of health.
A heavy load
The retailer's results were once again driven solely by the Hollister brand. Like Gap, which is being hailed as another turnaround in the making, but one which is almost wholly driven by its Old Navy brand, Abercrombie & Fitch is being carried along by its California "endless summer" teen brand Hollister.
Net sales for the division surged 10% year over year to $508 million on the back of an 8% increase in comparable sales. In contrast, the flagship Abercrombie unit saw sales continue to fall for the period, down 2% on a 2% decline in comps.
Data source: Abercrombie & Fitch quarterly SEC filings. Chart by author.
Admittedly, it's a better performance than Abercrombie has turned in in quite a while, and comparable sales have been improving all year long. In the first quarter they were down 10% and in the second they were down 7%, so a 2% decline is a big improvement and indicates it's moving in the right direction, but the continued underperformance shows why Abercrombie & Fitch continues to downplay its namesake brand. Over 60% of its stores now carry the Hollister name.