Will Higher Expenses Hurt Abercrombie's (ANF) Q2 Earnings?

Abercrombie & Fitch Co. (NYSE:ANF) is scheduled to report second-quarter fiscal 2019 on Aug 29, before the opening bell.

Notably, the company boasts an impressive earnings surprise history, having outpaced the Zacks Consensus Estimate for eight straight quarters. Moreover, the company delivered an average trailing four-quarter positive earnings surprise of 89.1%.

Let’s see what’s in store for the company this time around.

Which Way Are Q2 Estimates Headed?

The Zacks Consensus Estimate for the bottom line is pegged at a loss of 51 cents. In the year-ago quarter, the company had reported earnings of 6 cents per share. Notably, the consensus mark has remained unchanged over the past 30 days.

For quarterly revenues, the Zacks Consensus Estimate stands at $853.2 million, suggesting an increase of 1.3% from the figure reported in the prior-year quarter.

Factors Likely to Impact 2Q19

On the first-quarter conference call, Abercrombie projected adjusted operating expenses to be flat to up 1% during second-quarter fiscal 2019. Operating expenses (excluding other operating income) are estimated to increase 10% year over year. Moreover, management had revised the expense view for fiscal 2019 owing to increased impacts of foreign currency and higher operating expenses. Operating expenses, excluding other operating income, are expected to increase nearly 4-5% year over year in fiscal 2019. Increase in operating expenses mainly reflects net lease-related charges of about $45 million or 220 basis points (bps) due to the closure of the SoHo and Fukuoka flagships. This is likely to hurt Abercrombie’s performance in the fiscal second quarter.

Apart from the elevated operating expense view for second-quarter fiscal 2019, the company issued soft sales and margin outlook. Management anticipates sales to be flat to up 2%, down from 8% growth registered in the year-ago quarter. This includes an adverse impact of nearly $10 million from negative currency translations. Further, comparable sales (comps) in the to-be-reported quarter are anticipated to remain flat compared with an increase of 3% in the prior-year quarter. Gross margin is likely to decline nearly 100 bps from 60.2% reported in the year-ago quarter. Lower gross margin can be primarily attributed to expectations of increased currency headwinds and promotional activity.

However, Abercrombie’s strategic capital investments, cost-saving efforts, loyalty and marketing programs are encouraging, which might cushion results in second-quarter fiscal 2019. Further, it is benefiting from strength in Hollister and digital businesses. The company’s investments in mobile, omni-channel and fulfillment have been significantly bolstering its digital business.

Additionally, the expansion of Hollister stores in new markets represents a long-term growth opportunity for Abercrombie, given the brand’s sturdy momentum. Impressively, Hollister is gaining from the positive customer response toward product innovations, digital and emerging categories. As a result, the brand has delivered 10th straight quarter of comps growth in the fiscal first quarter, performing well across all channels and geographies. These strategic endeavors are likely to aid top- and bottom-lines in the to-be-reported quarter.

What Does the Zacks Model Say?

Our proven model does not show that Abercrombie is likely to beat earnings estimates in second-quarter fiscal 2019. A stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although Abercrombie has a Zacks Rank #3, its Earnings ESP of -3.03% makes surprise prediction difficult.

Stocks Poised to Beat Earnings Estimates

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Burlington Stores, Inc. (NYSE:BURL) has an Earnings ESP of +1.13% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Target Corporation (NYSE:TGT) has an Earnings ESP of +1.04% and a Zacks Rank of 2.

Costco Wholesale Corporation (NASDAQ:COST) has an Earnings ESP of +0.30% and a Zacks Rank #3.

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