Retailer’s same-store sales in both the U.S. and international markets fell 4% Y-o-Y in Q2 FY16
Global specialty retailer Abercrombie & Fitch Co. (NYSE: ANF) announced its Q2 FY16 financial results on August 30th, 2016.
The New Albany, Ohio-based Company, through its subsidiaries, operates as a specialty retailer of casual apparel for men, women and kids with an active, youthful lifestyle under its Abercrombie & Fitch, Abercrombie kids, and Hollister Co. brand names.
As of March 2nd, 2016, the Company operated 754 stores in the U.S. and 178 stores in Canada, Europe, Asia, and the Middle East. The Company sells its products through its stores and direct-to-consumer sales as well as through its e-commerce websites at www.abercrombie.com, www.abercrombiekids.com and www.hollisterco.com. Read more about Abercrombie & Fitch’s financial results below.
Q2 FY16 financial highlights
During Q2 FY16, Abercrombie & Fitch’s net sales declined 4% to $783.2 million compared to the prior-year period. Same-store sales for the quarter in both the U.S. and international markets fell 4% Y-o-Y. Companywide, same-store sales were down 4% during the reporting quarter.
By brand, net sales for Q2 FY16 fell 5% to $363.1 million for Abercrombie and decreased 4% to $420.1 million for Hollister versus last year. By geography, net sales for Q2 FY16 fell 7% to $478.8 million in the U.S. and were approximately flat at $304.4 million in the international markets versus last year. The lone bright spot was direct-to-consumer sales, which accounted for about 23% of total net sales for Q2 FY16 compared to 21% of total net sales last year.
The Q2 FY16 results show that Abercrombie and specialty retailers at large are struggling with a tourism slowdown owing to their heavy reliance on large, flagship locations in major cities to drive sales. Abercrombie’s poor performance is attributed to the dearth of spending by travelers, who have been discouraged from shopping due to the strengthening dollar and global economic uncertainty. As a consequence, flagship and tourist locations continued to account for the vast majority of the comparable sales decline during the reporting quarter; the Company expects those stores to continue to weigh on its business for the rest of the year.
During Q2 FY16, Abercrombie’s gross margins slipped from 62.3% Y-o-Y to 60.9%, primarily due to higher average unit costs, partially offset by lower average unit retails.
Stores and distribution expense for Q2 FY16 fell to $382.9 million from $389.2 million last year. Excluding certain items in the year-ago period, stores and distribution expenses fell $4.9 million, primarily due to the realization of savings on lower sales and expense reduction efforts, partially offset by higher direct-to-consumer costs.
During Q2 FY16, Abercrombie’s marketing, general, and administrative expenses fell to $111.7 million from $119.8 million last year. Excluding certain items in the year-ago period, marketing, general, and administrative expenses grew to $7.6 million, primarily due to higher marketing and other expenses. Net other operating income for Q2 FY16 was $13.1 million compared to net other operating income of $1.1 million last year. Excluding certain items in Q2 FY16, net other operating income decreased $0.3 million.
As a result, Abercrombie swung to an operating loss of $10.8 million for Q2 FY16, compared to an operating income of $2.0 million last year. Excluding certain items, adjusted non-GAAP operating loss for Q2 FY16 was $16.7 million compared to adjusted non-GAAP operating income of $16.5 million last year.
Consequently, Abercrombie’s net loss for Q2 FY16 widened to $13.1 million, or diluted loss per share of $0.19, compared to net loss of $0.8 million, or net loss per diluted share of $0.01, in the prior year period. Excluding certain items, adjusted non-GAAP net loss was $16.8 million, or net loss per diluted share of $0.25, compared to adjusted non-GAAP net income of $8.6 million, or earnings per diluted share of $0.12, last year. The results for Q2 FY16 reflect an adverse impact related to Y-o-Y changes in foreign currency exchange rates of $0.08 per diluted share.
Store update: As of the end of Q2 FY16, the Company operated 744 stores in the U.S. and 182 stores across Canada, Europe, Asia, and the Middle East. The company plans to open approximately 15 new stores in FY16, including approximately 10 in international markets, primarily China, and 5 in the U.S. The company plans to open 6 new outlet stores, primarily in the U.S. In addition, the company anticipates closing up to 60 stores in the U.S. during FY16 through natural lease expirations.
Partnership with Zalando: On August 24th, 2016, Abercrombie announced that it has entered into a wholesale agreement with Europe’s largest online fashion platform, Zalando. The German e-tailer has over 150,000 styles from over 1,500 brands for women, men, and kids. As part of the partnership, Zalando will start offering Abercrombie & Fitch, Hollister and Abercrombie kids products through its online stores in the 15 European markets that it serves, providing Abercrombie access to Zalando’s 18 million active customers.
Dividend: Abercrombie announced on August 17th, 2016, that its Board of Directors declared a quarterly cash dividend of $0.20 per share on the Class A Common Stock, payable on September 12th, 2016 to stockholders of record at the close of business on September 2nd, 2016.
Guidance for full year FY16
Abercrombie expects to face headwinds in comparable sales through H2 FY16, with a disproportionate effect from flagship and tourist locations. The Company also expects adverse effects from foreign currency on sales of approximately $25 million and on operating income of approximately $20 million, with the greatest impact in Q3 FY16. Gross margin rate is expected to remain flat to last year’s adjusted non-GAAP rate of 61.9%, but down in Q3 FY16 due to adverse effects from foreign currency. Operating expense dollars are predicted to be down slightly to last year’s adjusted non-GAAP operating expense, with investments in marketing, skewed towards Q3 FY16, offset by savings from expense reduction efforts.
Apart from this, Abercrombie expects net income attributable to non-controlling interests of approximately $5 million. The company expects capital expenditures to be at the low end of the range of $150 million to $175 million for the full year FY16. Overall, Abercrombie expects headwinds to persist for domestic teen retailers, including heightened competition and a weak fashion cycle.
Abercrombie’s stock ended the day at $17.25, slipping 0.06%, at the close on Friday, September 9th, 2016, having vacillated between an intraday high of $17.27 and a low of $16.88 during the session. The stock’s trading volume was at 3,578,701 for the day. The Company’s market cap was at $1.17 billion as of Friday’s close.