Abercrombie & Fitch: Can Hollister Shine Again This Quarter?

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Stabilizing Margins

Abercrombie’s margins have held up despite the growing influence of mobile sales. Gross margin was 61% last quarter, down from 62% in the year earlier period. I expect gross margins to slide further if mobile growth explodes. The company cut selling costs to 44% of revenue from 47% in the year earlier period, and EBITDA margins were 13% versus 12% in the year earlier period. The revenue growth along with stable to improving margins have gotten alysts excited about the brand. This has also driven ANF’s explosive share price. I expect more of this tomorrow.

Pristine Balance Sheet

Abercrombie has a pristine balance sheet. Its $459 million in cash and equivalents exceed its $264 million debt load. Debt is about 0.6x run-rate EBITDA. The company’s liquidity and cash flow will allow it to sustain itself if the retail market turns down or if consumer trends change sharply. This flexibility allowed Abercrombie to pull its proposed sale last summer and go it alone. Its strong balance sheet reflects a prudent management team and gives it a competitive advantage in the cut-throat retail industry.

Conclusion

I expect another strong quarter from ANF. Strong guidance and an ability to replicate past success is key to the stock. I rate ANF a hold into earnings.

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