Strong Operating Margins
Improvement in Abercrombie’s operating income margin has coincided with its top line growth. This is a major reason analysts have warmed up to the brand. Gross margin was 58%, down from 59% in the year earlier period and 61% last quarter. Gross margin was helped by less discounting to move product through the stores. As more of its revenue growth comes from DTC its gross margin will likely continue to contract. Less discounting was offset by more sales through the lower-margin DTC channel. On a dollar basis gross profit was up 13% Y/Y, which was still commendable.
Abercrombie’s operating income margin was 11% – more than double the 5% reported in the year earlier period. Store expense was 37% versus 42% in the year earlier period. The company has been able to step away from promotions, as the company has benefited from strong brand awareness. On a dollar basis operating income more than doubled Y/Y. For now, Abercrombie appears to have its finger on the pulse of what millennials want. That has kept margins from free falling as it expands its DTC presence, and helped cut down on discounts and promotions.
Pristine Balance Sheet
Abercrombie was able to sustain itself amid declining sales and cash flow due its pristine balance sheet. This is a credit to management. The company now has cash of $675 million; its cash exceeds its debt load of $269 million by over $400 million. I would consider its cash hoard as a rainy day fund in cash the retail industry or the economy turns down again. Inventory grew around 6% – much less than sales growth – which implies the company is selling through its product, and stale inventory could be a thing of the past. Strong liquidity could be a key weapon in the cut throat retail industry.
Conclusion
Abercrombie delivered another strong quarter. The company is poised for growth, assuming the economy holds up. If not, its strong balance sheet could allow it to weather the storm. It may have to. The stimulus-induced economy may be out of new gimmicks if the Fed hikes rates as previously intimated. A lack of stimulus could send financial markets and ANF lower. I rate the stock a hold.
