This is a summary of the third quarter fiscal 2008 earnings call conducted by Abercrombie & Fitch Co. (ANF) on November 14, 2008.
Management:
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CEO: Michael Jeffries
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VP Finance & Controller: Brian Logan
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CIO: Kristen Blume
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SVP & General Counsel: David Cupps
Key Investor Issues:
- Profit declined to $63.9 million, or 72 cents per share, from $117.6 million, or $1.29 per share a year ago.
- Revenue dropped 8% to $896.3 million from $973.9 million a year ago.
- Same-store sales fell 14% percent overall during the latest quarter.
- Fourth-quarter same-store sales are expected to be down about 26%.
- The company gave fourth-quarter earnings guidance between $1 and $1.05 per share.
Third Quarter Highlights:
The third quarter selling environment proved to be more challenging than anticipated.
The financial market crisis in late September led to a steep reduction in consumer spending and a drop in the consumer confidence index to an all-time low. Though virtually every retailer was negatively affected by these events, higher end aspirational retailers appeared to be hit the hardest.
Abercrombie moderated expense but did so without compromising the aspirational shopping experience and maintained its full price strategy that is based on product quality, not promotion.
The fiscal 2008 third quarter net sales for the 13 weeks ended November 1, 2008 decreased 8% to $896.3 million from $973.9 million a year ago.
- Third quarter direct to consumer net sales decreased 6% to $57.5 million.
- Total comparable store sales decreased 14%, average transactions per store per week decreased 20% while average transaction value was up 5% to last year.
Flagship and US based tourist stores continued to provide a significant benefit to the Abercrombie & Fitch brands’ comparable store sales results during the third quarter. Excluding such stores, the Abercrombie & Fitch brand would have produced a comparable store sales trend similar to that of the Hollister and Abercrombie brands.
Regionally, excluding flagship and tourist stores comparable store sales were down in all US regions and Canada.
From a merchandise classification standpoint for the total company, male comparable store sales were flat to last year, while female comparable store sales were down by a low 20%.
On the male side, knit tops, denim, and fragrance were strongest, while fleece and graphic tees were weakest.
- On the female side, tops were the primary driver of the comparable store sales decrease which included knit tops, fleece and graphic tees.
- The third quarter gross profit rate was 66.0% down 20 basis points compared to last year.
- An increase in the initial markup rate was more then offset by an increase in the markdown rate versus last year.
The increase in the markdown rate was the result of lower then expected sales during the third quarter. Abercrombie ended the third quarter with inventories up 13% per gross square foot at costs versus last year which was inline with the guidance given in the second quarter call.
Stores and distribution expense for the quarter as a percentage of sales increased 6.6 percentage points to 43.1% versus 36.5% last year.
Although Abercrombie reduced store payroll hours in response to declining sales, the increase in rate versus last year is primarily attributed to the limitation on leveraging fixed expenses due to the comparable store sales decline.
This year’s store and distribution expense also included approximately $5 million related to minimum wage and managers’ salary increases and approximately $5.5 million related to flagship pre-opening rent expense.
The distribution center UPH decreased 7% from last year due to a reduction in the number of units processed compared to last year.
For the third quarter marketing, general and administrative expense was $105 million, up 1% versus last year and lower then the $114 million to $116 million guidance range provided on the second quarter call.
