Photo: Flickr – Elvert Barnes
Following a disappointing earnings announcement, a cascade of price target revisions hit Abercrombie, with analysts at 18 banks lowering revisions, including Goldman Sachs, Barclays, and Deutsche Bank. BMO Capital also downgraded Abercrombie & Fitch when adjusting its estimates on the miss.
“We now see greater gross margin deterioration than we previously anticipated and believe the pace of margin recovery will take longer than expected, particularly given management’s aggressive promotional stance in the domestic channel,” BMO Capital analyst John Morris said. “Additionally, a weakening macro picture in Europe casts a cloud of uncertainty on the earnings power of [Abercrombie’s] international business in the near term.”
Abercrombie & Fitch has been buffeted by shareholders over the past two weeks, following a third quarter earnings miss and news that same-store sales at international flagships has turned negative.
Abercrombie reported net income for the quarter of $50.9 million, or $0.57 a share, compared to estimates for $0.71 compiled by Thomson Reuters. Last year, the retailer posted net income of $0.56 a share. Revenue for the quarter grew 21% to $1.1 billion.
The New Albany, Ohio, retailer has had difficulty matching growth seen over the last decade, when teenagers purchased nearly anything the store could manufacture.
Michael Jefferies, Abercrombie’s CEO, defended international growth on the company’s conference call with investors yesterday.
“If anyone is inclined to believe that a softening of our business in Europe, this quarter, in the face of severe macroeconomic headwinds is a major issue for our model, frankly, I think they are missing the forest for the trees,” he said.
Overseas flagships have contributed greater percentages of top and bottom line growth. Stores in Paris, Milan and London each generate upwards of $10 million in annual sales. The London store is second only to New York’s Fifth Avenue location in profit contribution.
The teen retailer has seen its stock price near 52-week lows after missing earnings consensus, erasing a 66% rally seen over the past year.
Photo: Eric Platt/Business Insider
Over the year, Abercrombie has closed three under performing stores domestically, while opening 25 Hollister and one Abercrombie & Fitch locations overseas.
U.S. sales have held up well on the back of higher promotional activity. However, that has pressured margins, which declined 360 basis points to 60.1%.
Inventories have increased by 32% over the year-ago period as the company prepares for holiday sales. That metric will be closely monitored by analysts worried that the retailer will have to turn further towards markdowns as Christmas approaches.