Abercrombie & Fitch Co. (ANF - Analyst Report) , a specialty retailer of premium, high-quality casual apparel, released second-quarter fiscal 2016 results. The company reported adjusted loss of 25 cents per share, wider than the Zacks Consensus Estimate of loss of 23 cents. In the year-ago quarter, the company had reported adjusted loss per share of 12 cents.

Earnings Estimate Revision: The Zacks Consensus Estimate for fiscal 2016 has remained stable over the last 30 days. In the trailing four quarters, excluding the quarter under review, the company outperformed the Zacks Consensus Estimate by an average of 99.3%.

Revenues: Abercrombie & Fitch’s net sales dipped 4% year over year to $783.2 million with a 4% decline in comparable sales. Net sales also fell short of the Zacks Consensus Estimate of $788.6 million. Net sales fell 5% to $363.1 million for Abercrombie and 4% to $420.1 million for Hollister.

Key Events: During the quarter under review, the company opened 1 U.S. Hollister store, 2 international Hollister stores and 1 U.S. Abercrombie & Fitch store. During fiscal 2016, the company expects to open about 15 new outlets, comprising approximately 10 in international markets, mainly in China, and approximately 5 in the U.S.The company also plans to open 6 new outlet stores, principally in the U.S.The company also plans to shutter approximately 60 stores in the U.S.

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Zacks Rank: Currently, Abercrombie & Fitch carries a Zacks Rank #3 (Hold) which is subject to change following the just released earnings results.

Stock Movement: Abercrombie & Fitch’s shares are down 12% during pre-market trading hours following the earnings release.

Quarter in Detail

Net sales were down nearly 4% year over year to $783.2 million and missed the Zacks Consensus Estimate of $789 million. The decline reflects a 7% drop in domestic sales to about $478.8 million and nearly flat international sales of $304.4 million. Also brand-wise, sales for Abercrombie fell 5% to $363.1 million while sales at Hollister declined 4% to $420.1 million.

However, net sales of the company benefited from a 23% contribution from its direct-to-consumer and omni-channel businesses in the reported quarter.

Comparable store sales (comps) slipped 4% owing to lower traffic, particularly at its flagship and tourist locations in the U.S. However, comps gained from the strength in its direct-to-customer business, on both domestic and international fronts, along with comps recovery at its Hollister European business, including the U.K. Also, the conversion trend remained solid in both channels, by brand and geography.

The Abercrombie brand recorded comparable sales decline of 7%, while Hollister witnessed a 2% fall.

Adjusted gross margin contracted 20 basis points in constant currency to 64.8%, mainly backed by higher average unit costs and partly offset by higher average unit retails. Additionally, constant-currency gross margin was largely stable due to tight expense and inventory controls.

Financials

Abercrombie ended the quarter with cash and cash equivalents of $455.6 million, long-term borrowings of $285.5 million, and shareholders’ equity of $1,232.2 million. As of Jul 30, 2016, inventories were $453.2 million, down nearly 5.3% from the prior-year quarter.

On Aug 17, management declared a quarterly cash dividend of 20 cents per share, payable on Sep 12, to shareholders on record as of Sep 2.

Store Update

During the fiscal second quarter, the company introduced two stores in the U.S., including one namesake and one Hollister store, while it opened two new international Hollister stores. Also, the company closed two namesake and one Hollister stores, both in the U.S. With this, the company operated 744 stores in the U.S. and 182 stores across Canada, Europe, Asia and the Middle East, as of Jul 30, 2016.

In fiscal 2016, the company plans to launch 15 stores, comprising 10 stores in international markets, specifically in China, and five domestic stores. Additionally, the company plans to open about six outlet stores in the U.S. Apart from this, the company intends to pull down shutters on approximately 60 stores in the U.S.

Outlook

Following the dismal fiscal second quarter, the company expects comps to remain challenging in the second half of fiscal 2016, due to uneven results from flagship and tourist locations. Further, it expects foreign currency headwinds to hurt sales by nearly $25 million and operating income by $20 million in the fiscal second half, with the largest impact expected in the fiscal third quarter.

For fiscal 2016, the company expects adjusted gross margin to remain flat at nearly 61.9%, while the same is expected to decline in the third quarter due to adverse currency effects.

Operating expenses for the full fiscal are estimated to fall marginally from the fiscal 2015 levels, as investments in marketing, mainly tilted to the third quarter, will mostly be offset by savings from its expense reduction initiatives. The company expects the effective tax rate in mid-to-upper 30s, while net income attributable to non-controlling interests should come in at about $5 million. Shares outstanding are anticipated at about 68 million.

The company now expects capital expenditure at the lower end of its previous guidance of $150–$175 million, directed toward store openings and updates, direct-to-consumer and technological initiatives for fiscal 2016.