This is a summary of the first quarter fiscal 2008 earnings call conducted by Abercrombie & Fitch Co. (ANF: chart) on May 16, 2008.
Management:
Chief Financial Officer: Mike Kramer
VP, Finance: Mike Nuzzo
Chief Information Officer: Kristen Blum
Investor Relations: Brian Logan
Key Investor Issues:
- Abercrombie earned $62.1 million, or 69 cents per share, in the first quarter compared with profits of $60.1 million, or 65 cents a share a year ago.
- Sales rose 8% to $800.1 million from $742.4 million last year. Same store sales fell 3%.
- The company expects earnings for the first half of its 2008 fiscal year to come in within a range of $1.61 to $1.65 per share, representing a 5% to 8% increase from a year ago.
- Abercrombie will add a second flagship store in Europe, opening a store in Copenhagen, Denmark, in 2009.
First Quarter Highlights:
The first quarter selling environment proved to be more challenging than many had anticipated. Tough macro economic conditions led by declines in home values, turmoil in the credit markets and a rise in food and fuel prices combined with weaker job and income growth resulted in the consumer confidence index dropping to its lowest level in five years.
The female fashion business industry wide was soft compared to last year, particularly fashion knit tops, the company’s largest selling category. The two week shift in the Easter calendar pulled the corresponding spring breaks into colder weather period negatively affecting March sales which were not fully recouped in April.
- Excluding the anniversary of the grand opening period the Abercrombie & Fitch London Flagship and the Abercrombie & Fitch and Hollister Canadian stores all produced positive comparable store sales during the quarter.
- US International Tourist Stores in locations such as New York, Miami, Orlando, Las Vegas and San Francisco were very productive during the quarter which was a performance driver for the Abercrombie & Fitch Brand.
- The increase in Tourist Store sales during the quarter was led by the already very productive 5th Avenue Flagship.
- The Direct to Consumer channel also remained strong posting a 44% increase in sales over last year, with the International Direct to Consumer business growing 78% over last year.
In addition to solid top line performance the company also posted a 6% increase in earnings per share despite a 3% drop in comparable store sales and the absorption of incremental expense associated with minimum wage increases and pre-opening related to Abercrombie & Fitch Tokyo Flagship during the quarter. The result was achieved through the strength of the gross margin and by strategically cutting operating costs.
Initial markups continue to provide a benefit driven by savings and sourcing and logistics, London premium pricing and strategic price increases in select categories.
- In addition, the focus on inventory management enabled the company to keep markdowns in check.
- Expense control was also a key driver of the bottom line performance.
- The company controlled variable costs throughout the organization including store payroll hours, home office travel and other store and home office expenses.
- The company continues to invest in stores, merchandise development and home office infrastructure.
On the merchandise side the IDC and sourcing teams have made strides in product quality and the use of leading techniques in graphics, appliqué and fabric catch string.
In stores, merchandise remained full price and the company continued to refresh stores such as upgrading sound systems in the chain.
The store growth initiatives are moving forward as planned.
Hollister, the primary domestic driver of new store growth in the near term still has opportunities in many high quality US malls. Hollister stores open less than one year exceed the initial sales targets and produce a store contribution rate better than or equal to that of the existing chain.
The first Hollister Flagship in New York is still scheduled for an early 2009 opening and will display new and exciting store experience elements.
The company plans to open its first Kids Flagship of 5th Avenue in New York in 2010. The management believes that both Flagships can further fortify the iconic image of these brands as the company looks to expand internationally.
Internationally the company recently announced plans to open a second European Abercrombie & Fitch Flagship in Copenhagen, Denmark in 2009.
The company is in the process of securing locations in Italy, France, Germany, Spain and Sweden. The plan for a late 2009 opening of the first Flagship in Asia located in Tokyo’s Ginsa District remains on schedule. In addition the company is on track to open the first of four Hollister mall based stores in the UK in October of this year.
