Abercrombie & Fitch Co. ANF has been grappling with supply-chain disruptions, raw material inflation and higher freight costs. Investments in marketing, increased digital fulfillment expenses and higher incentive-based compensation are other headwinds.
This led to the dismal fourth-quarter fiscal 2021 results, wherein both top and bottom lines missed the Zacks Consensus Estimate. Adjusted earnings declined 24% year over year due to inventory delays during the peak holiday season and the surge in Omicron cases, which led to soft sales trends in the quarter. Sales in the quarter were mainly impacted by unexpected inventory delays for the peak holiday selling period, primarily impacting Hollister and Gilly Hicks.
Industry-wide supply-chain disruptions due to port congestions dented margins in the fiscal fourth quarter. The gross margin contracted 220 basis points to 58.3% due to an $80-million (700 bps) increase in freight costs. For fiscal 2022, the gross margin is expected to decline 200 bps year over year, including freight and raw material inflation of 300-400 bps, with most freight expenses weighted in the first half and raw materials in the second half. Abercrombie expects the fiscal first-quarter gross margin to decline 400 bps year over year due to incremental adverse impacts of $65 million of freight cost pressure.
The company has been witnessing elevated costs for a while now. In fourth-quarter fiscal 2021, operating expenses, excluding other operating income, increased 5.4% year over year due to higher payroll and marketing expenses, partially offset by a decline in store occupancy expenses. Going into fiscal 2022, management anticipates operating expenses, excluding other income, to increase in a range similar to sales, suggesting an increase of 2-4% from the fiscal 2021 reported level. The company anticipates fiscal first-quarter operating expenses, excluding other operating income, to increase 6% year over year.
Efforts to Overcome Hurdles
Given all these aforementioned headwinds, management is looking into every nook and cranny for growth. Abercrombie has been on track with its cost-minimization measures, as well as strategic investments across marketing, technology and fulfillment.
The company’s adjusted operating margin reflected gains from prudent expense management strategies in the fourth quarter of fiscal 2021. It also witnessed higher AUR across brands and channels, driven by reduced promotions, markdowns and clearance activity. Notably, it marked the seventh successive quarter of AUR improvement. Going into first-quarter fiscal 2022, management expects to deliver operating margin above the pre-pandemic level. It also anticipates higher AUR, driven by a rise in selected tickets and a continued decline in promotions. The company remains on track and leverages some of its structural cost savings to boost top-line growth through investments in brand marketing, digital experience, and growing Gilly Hicks and Social Tourist brands.
Its digital business has been performing well. The metric rose 17% year over year on the back of new customers and robust digital marketing efforts. Also, high customer retention and spend per customer aided sales growth. Digital sales contributed about 48% to total sales in fourth-quarter fiscal 2021, up from 40% of total sales in fourth-quarter fiscal 2019. The company plans to continue investing in bolstering omni-channel capabilities, including curbside and ship-from-store services. It is also striving to optimize capacity at its distribution centers to meet increased digital demand.
As part of its store-optimization plans, ANF plans to reposition larger-format flagship locations to smaller omni-channel-enabled stores. Progressing on these efforts, the company closed 21 stores in the fiscal fourth quarter. This brings the total store closures to 44 in fiscal 2021.
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Consequently, shares of this company have lost 8.3% year to date compared with the industry’s decline of 23.7%.
Conclusion
Although supply-chain disruptions and delays persist, this Zacks Rank #3 (Hold) stock is likely to get back on track in the near term, as evident from its efforts, including reduced square footage, expanded digital penetration and cost-minimization measures. Topping it, a VGM Score of A raises optimism in the stock.
Stocks to Consider
Here are three better-ranked stocks to consider — Nordstrom JWN, Tapestry TPR and Target TGT.
Nordstrom presently sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 13.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Nordstrom’s current financial-year sales and EPS suggests growth of 5.7% and 180%, respectively, from the year-ago period’s reported numbers. JWN has an expected EPS growth rate of 6% for three-five years.
Tapestry presently has a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 28.2%, on average.
The Zacks Consensus Estimate for Tapestry’s current financial-year sales and EPS suggests growth of 17.5% and 22.9%, respectively, from the year-ago period’s reported numbers. TPR has an expected EPS growth rate of 12.5% for three-five years.
Target currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 21.3%, on average.
The Zacks Consensus Estimate for Target’s current financial-year sales and EPS suggests growth of 3.5% and 6.7%, respectively, from the year-ago period’s reported figures. TGT has an expected EPS growth rate of 16.5% for three-five years.
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