Abercrombie & Fitch Q2 results fail to meet expectations

August 16, 2012 - United Kingdom

Abercrombie & Fitch Co. reported unaudited results which reflected net income of $15.5 million and net income per diluted share of $0.19 for the thirteen weeks ended July 28, 2012, compared to net income of $32.0 million and net income per diluted share of $0.35 for the thirteen weeks ended July 30, 2011. 

Mike Jeffries, Chief Executive Officer and Chairman of the Board of Abercrombie & Fitch Co., said: "The second quarter results we are reporting today are disappointing and below our expectations coming into the quarter. In particular, we saw a further deceleration in the trend in our international stores, while our U.S. chain stores also comped negatively for the quarter for the first time since 2009. Our direct to consumer business remained a bright spot, posting its tenth successive quarter with growth of 25% or better.

Our entire organization is completely focused on improving upon the trends we have seen. There are factors beyond our control but, as a team, we believe there are opportunities to do better. We continue to be confident in the global appeal of our iconic brands. This was once again affirmed by the tremendous reception our Hong Kong flagship received at its opening this past Saturday. We remain excited and optimistic about the opportunities ahead of us, and we will be disciplined and judicious in our use of our shareholders' capital to pursue those opportunities."

Second Quarter Summary

Net sales for the thirteen weeks ended July 28, 2012 increased 4% to $951.4 million from $916.8 million for the thirteen weeks ended July 30, 2011. Total U.S. sales, including direct-to-consumer sales, decreased 5% to $648.0 million. Total international sales, including direct-to-consumer sales, increased 31% to $303.4 million. Total Company direct-to-consumer sales, including shipping and handling, increased 25% to $127.7 million.

Total comparable store sales for the quarter decreased 10% relative to last year. By brand, comparable store sales decreased 11% for Abercrombie & Fitch, 10% for abercrombie kids, and 10% for Hollister Co. Total sales by brand were $362.5 million for Abercrombie & Fitch, $76.3 million for abercrombie kids and $485.6 million for Hollister Co.

The gross profit rate for the second quarter was 62.5%, 110 basis points lower than last year's second quarter gross profit rate. The decrease in the gross profit rate was driven by an increase in average unit cost and the adverse effect of exchange rates, partially offset by an international mix benefit. 

Stores and distribution expense, as a percentage of net sales, increased to 48.1% from 46.4% for the second quarter of last year. The increase in the stores and distribution rate was primarily the result of deleveraging on negative comparable store sales.   

Marketing, general and administrative expense for the second quarter was $111.3 million, compared to $110.0 million during the same period last year. The increase in marketing, general and administrative expense was due to increases in marketing expense, IT expense, travel and other expenses, largely offset by a decrease in incentive compensation expense. 


The effective tax rate for continuing operations for the thirteen weeks ended July 28, 2012 was 38.9% compared to 30.7% for the prior year comparable period. The increase in the rate was primarily the result of a reduced benefit related to international operations which are taxed at a lower rate.

Net income was $15.5 million and net income per diluted share was $0.19 for the thirteen weeks ended July 28, 2012, compared to net income of $32.0 million and net income per diluted share of $0.35 for the comparable period last year.

The Company ended the second quarter of fiscal 2012 with $312.2 million in cash and cash equivalents, $20.1 million in current marketable securities, and borrowings under the revolving credit agreement of $75.0 million.

The Company did not repurchase shares of its common stock during the quarter.

During the quarter the Company opened a combined Hollister Co. and Gilly Hicks store in London on Regent Street, seven international Hollister Co. chain stores and three international Gilly Hicks chain stores.  Subsequent to quarter end, the Company has opened an Abercrombie & Fitch flagship store in Hong Kong.

2012 Outlook

Based on a lower sales trend than previously projected, the Company now expects full year diluted earnings per share of approximately $2.50 to $2.75. This projection assumes comparable store sales will decline 10% for the second half of the year.

The Company continues to expect substantial recovery of the gross margin rate erosion seen in 2011 on a 2012 full year basis. In addition to lower sales, the reduction in projected earnings per share also reflects the impact of a stronger US dollar and the impact of an increase in the effective tax rate. The Company now expects the tax rate for the year as a whole to be in the high 30s.

The Company will provide a strategic update on its international expansion plans, capital allocation plans, and its initiatives to increase domestic store profitability, as well as additional information on productivity, profitability and return on investment related to the Company's international operations during its earnings call at 8:30 AM today.

The strategic update will include:

  • A reduction in the expected number of fiscal 2012 international Hollister Co. chain store openings to approximately 30 stores from a previous expectation of close to 40 stores. 
  • A pause in new flagship store commitments, other than a planned Shanghai location.
  • A reduced run rate for future international chain store openings, with a focus on under-penetrated markets where cannibalization effects are expected to be minimal, and subject to continued approval on a store by store basis. 
  • An updated fiscal 2012 capital expenditure budget of approximately $360 million, and an anticipated fiscal 2013 capital expenditure budget of approximately $200 million.
  • An update on the Company's share repurchase plans. 

The Company operated 15 Abercrombie & Fitch stores, five abercrombie kids stores, 92 Hollister Co. stores and seven Gilly Hicks stores internationally.