Abercrombie & Fitch Co. (ANF - Analyst Report) failed to impress with its fourth-quarter fiscal 2014 results, as both top and bottom lines witnessed a year-over-year decline. However, its earnings per share managed to beat the Zacks Consensus Estimate.

Benefitting from efficient expense management and better-than-expected gross margin, the company’s adjusted earnings of $1.15 per share in the fourth quarter beat the Zacks Consensus Estimate of $1.13, whereas the same fell 14.2% year over year.

Abercrombie & Fitch Company - Earnings Surprise | FindTheCompany

Including certain one-time items, Abercrombie posted earnings of 63 cents per share, which plunged 25.9% year over year.

Sales and Comps

Battered by store closures, adverse currency headwinds and a fall in comparable store sales (comps), net sales of this Zacks Rank #5 (Strong Sell) company declined about 14% year over year to $1,120 million. Moreover, quarterly revenues fell short of the Zacks Consensus Estimate of $1,168.8 million.

The fall in net sales reflects a 10% drop in domestic sales and a 20% slump in international sales, including direct-to-consumer sales, to $763 million and $357 million, respectively.

Including direct-to-consumer sales, the company’s total comps decreased 10%. Although U.S. and international comps declined 6% and 17%, respectively, total direct-to-consumer comps rose 1%.

Brand-wise, Abercrombie’s comparable sales, including direct-to-consumer sales at its Abercrombie & Fitch, abercrombie kids and Hollister stores, declined 9%, 6% and 11%, respectively. The company’s Abercrombie & Fitch, abercrombie kids and Hollister brands generated revenues of $424.1 million, $100.7 million and $593.5 million, respectively.

Quarter in Detail

In the fourth quarter, gross margin improved 190 basis points (bps) to 60.9%, backed by lower average unit costs, partly offset by unfavorable currency changes.

Adjusted store and distribution expenses, as a percentage of sales, expanded 50 bps to 39.4%, compared with the prior-year period. Savings from the company’s profit enhancement initiatives, which helped lower store payroll and other manageable store expenses and currency change benefits, were more than offset by increased direct-to-consumer expenses and negative comps.

Moreover, adjusted marketing, general and administrative expenses dipped nearly 1.3% to $113.9 million due to a fall in compensation expenses, partly offset by a rise in marketing costs. This excludes an expense of $5.3 million incurred in the fourth quarter, associated with the transition of the company’s CEO.
 

Fiscal 2014: A Glance

The company’s adjusted earnings for fiscal 2014 came in at $1.54 per share, down 19.4% year over year and also lagged the Zacks Consensus Estimate of $1.56. Including one-time items, the company’s earnings climbed 2.9% year over year to 71 cents a share. Net sales for the fiscal decreased 9% to $3,744 million, also missing the Zacks Consensus Estimate of $3,802 million.     

Financials

Abercrombie ended fiscal 2014 with cash and cash equivalents of $530.2 million, gross borrowings of $299.3 million and shareholders’ equity of $1,389.7 million. As of Jan 31, 2015, inventories were approximately $460.8 million, down nearly 13% from the prior-year quarter.

During the fiscal, Abercrombie incurred $174.6 million as capital expenditure, allocated toward store openings, store remodeling, IT, distribution centers and other home office projects. For fiscal 2015, the company anticipates capital expenditure of nearly $150 million.

Further, the company continued to enhance shareholder value by repurchasing about 7.3 million shares, valued at $285 million in fiscal 2014. Shares available for repurchase under the company’s authorization were approximately 9 million as of Jan 31, 2015.

On Feb 18, management announced a quarterly cash dividend of 20 cents a share, payable on Mar 11, 2015 to shareholders of record as on Mar 3.

Store Update

The company ended fiscal 2014 with a total of 969 stores, including 799 stores in the United States and 170 internationally. During the reported quarter, the company opened 3 stores in the U.S. and 5 stores globally. Additionally, it closed 38 stores across the U.S. and 1 international store.

During fiscal 2015, Abercrombie intends to open about 15 full-price international outlets and 4 North American full-price outlets. Moreover, the company plans to open about 11 U.S. outlet stores during the fiscal. Store closures in the U.S., due to lease expirations, are expected to come at about 60, during fiscal 2015.

Outlook

Abercrombie ended fiscal 2014 on quite a weak note, as its results came in below expectations. The company’s planned comps improvement failed to materialize and despite its stringent cost-control measures, the company was unable to offset the impact of soft sales.  

Going forward, management’s primary target for fiscal 2015 is to improve both domestic and global comps, by focusing on customers and enhancing product range. Next, it plans to undertake significant investments to develop its direct-to-consumer and omni-channel operations. The company also plans to remain committed to control costs and target overseas expansion in high-growth markets.

Following a difficult fiscal 2014, Abercrombie provided an outlook for fiscal 2015, during which it expects to be adversely impacted by foreign currency headwinds.

As for comps, management expects the unfavorable impact from lower logo sales to reduce in the first half of the fiscal and neutralize in the second half. Further, gross margin is anticipated to remain flat or rise marginally in fiscal 2015.

Other Stocks to Consider

Better-ranked stocks in the apparel-shoe industry include Citi Trends Inc. (CTRN -Analyst Report), Tilly's, Inc. (TLYS - Snapshot Report), each sporting a Zacks Rank #1 (Strong Buy) and DSW Inc. (DSW - Snapshot Report), carrying a Zacks Rank #2 (Buy).