This is a summary of the second quarter fiscal 2008 earnings call conducted by Abercrombie & Fitch Co. (ANF) on August 15, 2008.
Management:
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CFO, Executive VP: Michael W. Kramer
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Chairman of the Board, CEO: Michael S. Jeffries
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Vice President, Finance: Mike Nuzzo
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Chief Information Officer: Kristen Blume
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Manager, Investor Relations: Eric Cerny
Key Investor Issues:
- Net income in the quarter declined to $77.8 million, or 87 cents a share, from $81.3 million, or 88 cents, a year earlier.
- Sales at the teen retailer increased 5.1% from a year ago to $845.8 million with comparable-store sales dropping 4%.
- Abercrombie & Fitch guided full-year 2008 profit to the range of $4.95 to $5 a share, with the low end of the forecast reflecting a 7% drop in same-store sales.
- The company targets capital spending of between $405 million and $410 million and plans to increase gross square footage by about 9% to 10% for fiscal year 2008.
Second Quarter Highlights:
The second quarter selling environment continued to be challenging. Macroeconomic conditions remained weak throughout the quarter and the selling environment, particularly as the company moved into the back-to-school selling period, was tough. In the face of a difficult macroeconomic environment, the company remains committed to its investment and growth plans, which will position Abercrombie & Fitch for long-term success.
Second quarter net sales increased 5% to $845.8 million, from $804.5 million for the 13 weeks ended August 4, 2007.
- Second quarter direct-to-consumer net sales increased 23% to $55.9 million.
- Total comparable store sales decreased 4%.
- Transactions per week decreased 11%.
- Average transaction value was up 6% to last year.
- Regionally, comps were strongest in the tour stores and weakest in the Midwest.
As previously reported, July sales were weaker across the board in all brands and store segments. For the total company during the second quarter, male tops and shorts performed well, as well as denim and fragrance in both genders. Female tops, pants, and woven shorts underperformed in the quarter.
The Abercrombie & Fitch tour stores continued to have a significant impact on the brand’s comp store sales results.
For the second quarter, excluding such stores from the comp base, would show Abercrombie & Fitch with a comp store sales trend similar to Hollister.
The second quarter gross profit rate was 70.1%, 130 basis points higher compared to last year.
The change in rate is attributed to a higher initial mark-up rate versus last year. As in the first quarter, London pricing and price increases in select departments contributed to the higher initial mark-up rate. The company’s mark-down rate in the quarter was flat to last year.
Abercrombie & Fitch ended the second quarter with inventories down 1% per gross square foot at costs versus last year, slightly lower than the guidance from the first quarter call that estimated a flat inventory result. Even with the business decline in July, the company managed the level of late Spring and the timing of early Fall merchandise deliveries to contribute to this result.
Abercrombie & Fitch ended the second quarter with slightly higher basic inventory levels compared with last year, due primarily to an increased investment in denim inventory consistent with the up-trend in this business.
Stores and distribution expense for the quarter as a percentage of sales increased 100 basis points to 42.6% versus 41.6% last year.
The increase in rate versus last year reflects the negative 4% comp store sales results, the impact of higher minimum wage rates, and higher direct expense rates, specifically related to flagship pre-opening rent expenses. Abercrombie & Fitch implemented a number of store payroll expense saving efforts in the quarter that in combination managed to generate leverage in this line item, even with both the sales decline and added minimum wage expenses. The distribution center UPH increased 18% from last year.
Marketing, general and administrative expense was $109 million, slightly higher than the $105 million to $108 million guidance provided on the first quarter call.
As a percentage of sales, MG&A increased 70 basis points to 12.9% from 12.2% last year. This result includes approximately $1.6 million in expenses associated with the departure of a senior executive. The increase in rate versus last year also reflects continued investment in home office resources necessary for international expansion.
For the second quarter, operating income was $124 million compared to $124.1 million last year.
- Operating income as a percentage of sales was 14.7% versus 15.4% last year.
- The effective tax rate for the second quarter was 38.1% compared to 36.6% for the second quarter 2007.
- Last year’s rate reflected the favorable impact from the settlement of tax audits.
