Whether Abercrombie & Fitch (ANF) posted compelling or disappointing results for its fiscal second quarter depends on your perspective. But given that ANF stock gained as much as 15% in the wake of earnings news, perhaps the market has chosen to see the glass as half full.
And why not? The top and bottom lines rolled in better than expected.
On the other hand, owners of ANF stock are eventually going to have to come to grips with the fact that topping expectations doesn’t solve the much bigger problem of waning sales and deteriorating profits.
Abercrombie & Fitch Q2 Results
The good news is, Abercrombie & Fitch earned 12 cents per share on $817.8 million in sales last quarter, versus expectations for a loss of 4 cents per share of ANF stock and revenue of $811.5 million.
The bad news is, revenue fell 8.2% from the year-ago top line of $890.6 million, while earnings fell 29%, from 17 cents per share of ANF stock to the aforementioned 12 cents per share this time around. And, perhaps most concerning of all, same-store sales fell 4%.
The market largely celebrated the same-store sales dip of 4%, as analysts had planned on a 6% decline. The company’s Hollister brand was the bright spot for the quarter … relatively. While Abercrombie & Fitch same-store sales fell 7%, Hollister same-store sales were “only” off 1%.
Reality Check for ANF Stock
Investors’ knee-jerk elation makes some superficial sense — they were planning for the worst-case scenario, and things weren’t as bad as expected.
Executive Chairman Arthur Martinez also may have steered the bullish response from the market today, saying:
“In our second quarter, we delivered a meaningful sequential improvement in comparable sales, stabilized gross margins and achieved significant expense reductions. Our results exceeded what we signaled in our first quarter earnings call and give us confidence that we are on the right track, although we recognize that we still have much to achieve.”
Those who haven’t bought into the rhetoric by buying into ANF stock yet, though, may want to take it all with a grain of salt. This company still has big-time problems.
Yes, the rate of decay for the top and bottom lines seems to be slowing, which could be interpreted as a sign that a turnaround is underway — the brakes on the downtrend need to be applied first before the company can put the vehicle in reverse. Given the fact that sales and earnings have fallen precipitously for two years now, though, it may be worth considering the possibility that the only reason the comps look less bad is that Abercrombie & Fitch has very little blood left to give.
As for Martinez’s optimism, the terms “meaningful sequential improvement in comparable sales,” “stabilized gross margins” and “achieved significant expense reductions” all merit a closer look.
In Q1 of this year, same-store sales fell 8%, making Q2’s 4% decline a technical improvement. As was noted though, it’s not clear if ANF did anything on its own to slow the downtrend … and it’s still trending down.
Gross margins were stabilized in the sense that they too looked better in Q2 than they did in Q1. Again, so what? Operating income slipped to a mere 0.2% of revenue, versus 2.2% of sales for the second quarter of 2014. Marketing and administrative expenses grew from 12.5% to 14.7% on a year-over-year basis.
Total operating expenses actually grew from 60.1% of total sales in the second quarter of 2014 to 60.2% of sales last quarter, and though they were well below the 69.5% rate seen in Q1 of this year, it should be noted that Q1’s operating expenses were unusually high and ripe for relative improvement.
In other words, there’s no real evidence anything’s actually changed for the better for Abercrombie & Fitch.
Bottom Line
No, it’s definitely not a “the rest of the story” message that fans and followers of Abercrombie & Fitch wanted to hear today. The truth is the truth, though — this company remains in dire straits even if things could have been worse. The spin on the earnings and sales beats isn’t apt to last long before the same old questions pop up again … questions like what has the company done that will definitively grow sales again?
Until there’s a clear and honest answer to that question, Wednesday’s jump from ANF stock is likely to be a short-lived stroke of luck.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
