This summary is based on the second quarter fiscal 2007 earnings call conducted by Abercrombie & Fitch Co. (ANF: chart) on August 22, 2007.
Vice President, Corporate Communications: Thomas D. Lennox
Chief Financial Officer, Executive Vice President: Michael W. Kramer
Vice President, Finance: Mike Nuzzo
Key Investors Issues
- EPS were 88 cents a share compared to 72 cents a share last year.
- Net earnings were $81.3 million, up 24% from $65.7 million in the year-ago period.
- Revenue rose to $804.5 million from $658.7 million a year ago.
Second Quarter Highlights
Net sales increased 22% to $804.5 million from $658.7 million a year ago.
- Direct-to-consumer net sales increased 66% to $45.6 million compared to last year.
- Total company comparable store sales declined 2% compared to last year.
- Gross profit rate was 68.8%, down 30 basis points compared to last year. The decrease in rate was due to a higher markdown rate, partially offset by higher improved initial markup versus last year. This gross margin result is consistent with a strong fashion tops business, which contributes to both a higher overall IMU and a higher overall markdown level.
- Inventories were down 12% per square foot at cost versus last year. This result is attributed to lower levels of basic inventory and having lower spring merchandise carryover on a square foot basis versus last year.
Stores and distribution expense as a percentage of sales increased 50 basis points to 41.6% versus 41.1% last year.
The increase in rate is attributed to increased direct-to-consumer expenses resulting from robust e-com sales growth, and increased store-related expenses, including supplies and maintenance.
- The company continued to tightly manage store payroll hours to match sales trends, while absorbing the added expense of minimum wage and management salary increases.
- Distribution center UPH increased 14%, reflecting greater efficiencies in the operation of second DC.
Marketing, general and administrative expenses decreased 80 basis points as a percentage of sales from 13.0% to 12.2%.
- The reduction in rate versus last year resulted primarily from a decline in legal, travel, sample, and in-store marketing expenses, which were partially offset by increased home office payroll as a percentage of sales.
- Operating income increased 21% to $124.1 million, compared to $102.4 million last year.
- The effective tax rate was 36.6%, compared to 37.5% for the 2006 comparable period. The reduction in rate versus the prior period primarily reflects the favorable settlement of a state tax audit.
- Net income increased 24% to $81.3 million versus $65.7 million last year.
- Net income per share increased 22% to 88 cents per share, versus 72 cents per share during the same period in 2006.
The company has developed an organizational structure that thrives on and benefits from the sharing of information.
To become more skilled and efficient, the company pulls expertise and establishes standards by discipline, and then applies these standards throughout the organization. Each standard is supported by a process that has been developed over time and is audited consistently. For example, brand standards are established at the home office by merchant team, who work in conjunction with areas including design and sourcing. Processes are in place to ensure criteria are met, including high levels of quality, proper fabric, trim and dye constraints, and consistency of fit, to name a few.
Each member of the team is trained and responsible for monitoring the process throughout production until received at the distribution center, where it is inspected by quality assurance as a finished good before transported to the stores. Similar standards are applied to every area of the business. As a company, improving even the highest standard is what distinguishes approach from the competition and will be critical to driving profitable growth as the business expands over the next several years. This mindset has enabled to operate at high productivity levels compared to other retailers, which should support high margins both domestically and internationally going forward. In fact, the company is pleased to have the opportunity to leverage operational strategy by growing the business.
The company is starting to reach its domestic capacity of 400 stores.
Regardless, five of most recently launched A&F stores, including the one on Fifth Avenue and those in Canada and London, are among the most productive and profitable stores in fleet.
Each of these stores continues to generate substantial volume and four wall profit. Compared to U.S. mall stores, this larger and more productive format is somewhat of a new model. Once the company adjusted to the new demands of running a high-volume store, the company was able to standardize approach, resulting in a valuable and profitable model. Based on this success, as well as on receipts from web business, the company is ready to expand throughout Europe and Japan. The company is looking for real estate in Italy, France, Germany, Spain, Denmark and Sweden, with plans to identify additional key locations in the United Kingdom.
The company recently secured space in the Ginza district of Tokyo. The company is focusing international rollout in heavily trafficked cities to enable to generate strong returns with fewer stores.
The company is excited because it believes the flagship format provides with an opportunity to generate strong returns on invested capital with Hollister as well.
The company is currently in the design phase with plans to open a Hollister flagship domestically. International rollout will follow. The company has secured excellent locations for RUEHL openings this year at Natick Mall, Annapolis and Washington Square in Oregon. The company is planning to open two kids stores in Toronto in 2008.
