Abercrombie & Fitch Company (NYSE:ANF) recently gained on solid holiday results that led to an improved outlook for fourth-quarter fiscal 2017. Moreover, the company has been in the spotlight for its robust strategic capital investments, cost saving efforts, loyalty and marketing programs. However, weakness at its namesake brand along with strained margins remains concerns.
Shares of Abercrombie have surged 69.6% in the past three months, outperforming the industry’s gain of 16.6%. Let’s analyze the pros and cons of this Zacks Rank #3 (Hold) company.
Robust Surprise Trend & Solid Holiday Show: Lifts View
Abercrombie’s robust surprise trend reflects an earnings beat in the last two quarters with sales beating estimates thrice in a row. This sturdy trend can be attributed to the company’s several strategic initiatives to spur its business forward.
Additionally, the company witnessed splendid performance across all its channels and brands during this holiday season. In fact, the results were driven by continued strength in Hollister brand and marked improvement in its namesake brand. Consequently, the company anticipates its namesake brand to deliver positive comps for the fourth quarter.
Following the spectacular results in the holiday season, the company raised its fourth-quarter fiscal 2017 guidance as well. It expects fourth-quarter comps to increase high-single digits versus low-single digits increase projected earlier. Sales growth is anticipated in the low-teens range against the previously forecasted mid- to high-single digits range.
Hollister Brand Expansion Aids Growth
Abercrombie is expanding its Hollister stores across new markets aggressively to counter the dismal performance at its namesake brand. Comparable store sales (comps) for the Hollister brand were up 8% in third-quarter fiscal 2017 as it continued to capitalize on momentum, delivering positive comps in both the United States and international markets. Additionally, the brand is gaining from the positive customer response to product innovations, emerging categories and overall customer experience.
Potential Strategic Initiatives
Abercrombie has been gaining from focus on revival of its brands, enhancing performance and returning to profitable growth. In this regard, it has taken several initiatives like improvement in its leadership team and organizational structure and optimizing store fleet by introducing stores in high-performing markets while closing the underperforming ones; remodeling stores and improving assortments to meet changing trends and demands; developing Omni-channel capabilities and focusing on key merchandise and design processes. Also, in an attempt to enhance margins, the company keeps its discounts low along with a check on promotional activities.
Final Thoughts
While all is well with Abercrombie, dismal performance at its namesake brand continues to impede results. Though the brand showed a marked improvement in the recent holiday period, a full turnaround is still away. Additionally, the company’s margins continue to be under pressure due to ongoing strategic initiatives to improve profitability.
Nevertheless, Abercrombie’s robust strategic initiatives along with continued strength at its Hollister brand will aid growth in the near term.
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Investors interested may consider Zumiez Inc. (NASDAQ:ZUMZ) , American Eagle Outfitters Inc. (NYSE:AEO) and Gap Inc. (NYSE:GPS) . While Zumiez flaunts a Zacks Rank #1 (Strong Buy), American Eagle and Gap carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Zumiez Sports delivered an average positive earnings surprise of 22.2% in the trailing four quarters. It has a long-term earnings growth rate of 18%.
American Eagle pulled off an average positive earnings surprise of 2.6% in the trailing four quarters. In addition, it has a long-term earnings growth rate of 5.5%.
Gap delivered an average positive earnings surprise of 10.3% in the trailing four quarters. It has a long-term earnings growth rate of 8%.
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