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Abercrombie & Fitch Co. (NYSE:ANF) reported GAAP net income per diluted share of $0.12 for the third quarter ended October 29, 2016, compared to GAAP net income per diluted share of $0.60 for the third quarter last year. Excluding certain items, the company reported adjusted non-GAAP net income per diluted share of $0.02 for the third quarter, compared to adjusted non-GAAP net income per diluted share of $0.48 last year. The adverse impact from year-over-year changes in foreign currency exchange rates for the quarter was approximately $0.09 per diluted share.

A description of the use of non-GAAP financial measures and a schedule reconciling GAAP financial measures to adjusted non-GAAP financial measures accompanies this release.

Arthur Martinez, Executive Chairman, said:

“As expected, our third quarter was challenging. While Hollister improved sequentially, it was more than offset by disappointing performance in A&F. On a total company basis, conversion trends remained positive across both channels and the direct-to-consumer business grew domestically and internationally. In addition, we remained disciplined as expense and inventory were well controlled.

We were pleased with the progress in Hollister where the comparable sales trend improved throughout the quarter. There continued to be positive response to Hollister’s product innovations, emerging categories and overall customer experience and we expect the comparable sales trend to further improve in the fourth quarter.

For A&F, flagship and tourist locations continued to be a major headwind. In addition, chain store traffic patterns remained negative. Weakness in A&F was compounded by underperformance of seasonal categories, which ultimately led to pressure on gross margin. While we anticipate the A&F business will remain challenging through the balance of the fiscal year, we continue to move aggressively to evolve the brand across all channels through significant changes in product, customer experience and marketing. A comprehensive set of strategic and operational actions is being taken by an experienced team under new leadership, and we expect to see benefits as our efforts gain traction.”

Third Quarter Sales Results

Net sales for the third quarter of $821.7 million were down 6% over last year, with comparable sales for the third quarter down 6%.

By brand, net sales for the third quarter decreased 13% to $358.3 million for Abercrombie and decreased 1% to $463.5 million for Hollister over last year.

By geography, net sales for the third quarter decreased 7% to $531.4 million in the U.S. and decreased 5% to $290.3 million in international markets over last year.

Direct-to-consumer and omnichannel sales grew to approximately 23% of total company net sales for the third quarter, compared to approximately 21% of total company net sales last year.

Additional Third Quarter Results Commentary

The gross profit rate for the third quarter was 62.2%. Excluding certain items last year, the gross profit rate decreased 60 basis points on a constant currency basis, primarily due to lower average unit retail, partially offset by lower average unit cost.

Stores and distribution expense for the third quarter was $386.6 million, down from $392.9 million last year. Excluding certain items last year, stores and distribution expense decreased $5.8 million, primarily due to the realization of savings on lower sales and expense reduction efforts, partially offset by higher direct-to-consumer expense.

Marketing, general and administrative expense for the third quarter was $105.3 million, down from $117.7 million last year. Excluding certain items, adjusted non-GAAP marketing, general and administrative expense decreased $6.4 million, primarily due to expense reduction efforts, partially offset by higher marketing expenses.

Net other operating income for the third quarter was $0.8 million, compared to net other operating income of $3.9 million last year.

Operating income for the third quarter was $19.6 million, compared to operating income of $41.0 million last year.  Excluding certain items, adjusted non-GAAP operating income for the third quarter decreased $37.4 million.

The effective tax rate for the third quarter was 45%, reflecting a catch-up adjustment related to a change in the estimated full year effective tax rate.

Net income attributable to Abercrombie & Fitch Co. for the third quarter was $7.9 million, compared to net income attributable to Abercrombie & Fitch Co. of $41.9 million last year. Excluding certain items, adjusted non-GAAP net income attributable to Abercrombie & Fitch Co. for the third quarter was $1.4 million, compared to adjusted non-GAAP net income attributable to Abercrombie & Fitch Co. of $32.9 million last year.

The company ended the quarter with $469.7 million in cash and cash equivalents, and gross borrowings under the company’s term loan agreement of $293.3 million, compared to $405.6 million in cash and cash equivalents and $297.0 million in borrowings last year.

The company ended the quarter with $516.1 million in inventory, a decrease of 14% versus last year.

Other Developments

As previously announced, on November 16, 2016 the Board of Directors declared a quarterly cash dividend of $0.20 per share on the Class A Common Stock of Abercrombie & Fitch Co., payable on December 12, 2016 to stockholders of record at the close of business on December 2, 2016.

The company will be closing its A&F flagship store in Seoul in January 2017.  In addition, subsequent to the end of the third quarter, the company exercised a lease kick-out option for its A&F flagship store in Hong Kong.  As a result of this decision, the company expects to incur a lease termination charge of approximately $16 million during the fourth quarter.  These actions are part of the company’s ongoing strategic review and are expected to drive economic benefit over time.

Outlook

For the fourth quarter of fiscal 2016, the company expects:

  • Comparable sales to be challenging, but modestly improved from the third quarter
  • Continued adverse impact from foreign currency on sales and operating income
  • A gross margin rate down slightly to last year’s adjusted non-GAAP rate of 60.7%, driven by lower average unit retail, partially offset by lower average unit cost
  • Operating expense, including a lease termination charge of approximately $16 million, to be up about 1% from last year’s adjusted non-GAAP operating expense of $554 million, with the lease termination charge partially offset by savings from lower sales and expense reduction efforts
  • Net income attributable to noncontrolling interests of approximately $1 million
  • A weighted average diluted share count of approximately 68 million shares, excluding the effect of potential share buybacks

On a full year basis, the company expects the effective tax rate to be in the mid to upper 20s, but to remain sensitive at lower levels of pre-tax earnings.

The company now expects capital expenditures to be approximately $140 million for the full year.

In addition to the 13 stores opened year to date, including five outlet stores, the company expects to open seven new stores in the fourth quarter, including five in China and two in the U.S. The company also anticipates closing approximately 35 stores in the U.S. in the fourth quarter through natural lease expirations, in addition to the 15 stores closed year to date.

Excluded from the company’s outlook are the effects of certain potential items, such as asset impairment charges, litigation charges and insurance recoveries. (Original Source)

Shares of Abercrombie are currently falling 12% to $2.03 in pre-market trading Friday. ANF has a 1-year high of $32.83 and a 1-year low of $14. The stock’s 50-day moving average is $15.85 and its 200-day moving average is $19.46.

On the ratings front, ANF stock has been the subject of a number of recent research reports. In a report issued on November 15, FBR analyst Susan Anderson downgraded ANF to Sell, with a price target of $14, which implies a downside of 17% from current levels. Separately, on November 14, Wolfe Research’s Adrienne Tennant downgraded the stock to Hold .

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Susan Anderson and Adrienne Tennant have a yearly average return of 3.5% and 5.4% respectively. Anderson has a success rate of 53% and is ranked #993 out of 4229 analysts, while Tennant has a success rate of 52% and is ranked #694.

Overall, 2 research analysts have rated the stock with a Sell rating, 12 research analysts have assigned a Hold rating and one research analyst has given a a Buy rating to the stock. When considering if perhaps the stock is under or overvalued, the average price target is $18.40 which is 9% above where the stock closed yesterday.

Abercrombie & Fitch Co. engages in the retail of apparel, personal care products and accessories. It also operates stores and direct-to-consumer operations. It sells casual sportswear apparel, including knit and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women and kids under the Abercrombie & Fitch, Abercrombie, Hollister, RUEHL brands and Gilly Hicks brand. It operates through the Abercrombie and Hollister segments. The Abercrombie segment includes brands Abercrombie and Fitch and Abercrombie Kids.