Abercrombie & Fitch (ANF) has just reported its Q3 earnings and shares are putting together a nice rally this morning. Is this the bottom for this apparel store? Has retail been punished so far, for so long, that we can finally make investments in this space again? We have covered a number of clothing and fashion outlets lately, and all of them have surpassed expectations. This bodes very well for the sector and flies in the face of those saying traditional brick and mortar retail, those based in malls and outlets especially, are dead.

Shares have been decimated. Of course, we need to realize that expectations have been drastically reduced. Still, the quarter certainly was much better than expected. What is quite sad is that even with this rally, which is truly impressive as shares are up about 18% at the time of this writing, the stock is only making up for losses it saw in the last two months. That being said, forget the past. It simply does not matter where a stock has been, it matters where it is going. And it appears, we are heading higher.

We generally refuse to make bottom calls as this is generally a fool’s errand, but signs are pointing to a sector wide bottom. This doesn’t mean individual companies won’t struggle, or even fail, but expectations have fallen so low that now these once mighty retailers are returning to favor, at least in the short-term. There is indeed a long way to go, but if this marks the turn around, Q2 2017 and Q3 2017 will go down in retail history as the year it all changed. We suppose that holds true if the sector does die too. We digress.

We are of the belief that ANF’s struggles will continue, but that it has effectively begun to manage its properties and inventories to adjust to the ever-changing consumer. Still, many of the critical metrics have us concerned.

While much of the retail sector has been struggling, other competitors’ reports have been solid. Abercrombie delivered as well. After all of the recent selling in the sector in recent weeks, stocks in this sector were seriously being priced as if the entire sector was facing extinction. As we all know, retailers have been decimated, but they are simply in transition. Not all will survive. The big issues are foot traffic and online competition. It is a tough space no doubt. Expectations were dismal, but they were beat.

In Q3 2017, the company reported a net gain of $0.15 per share, as reported, gaining even more than last year when it made $0.12 per share. Of course, if we make some adjustments of certain items, net gain was $0.30 per share, doing far better than last year’s adjusted net gain of just $0.02 per share. The Street was looking for much less. Therefore, even with the year-over-year decrease in earnings, the company surpassed consensus estimates. In fact, the Street was looking for just $0.22 per share, rather atrocious. However, with these results, ANF surpassed expectations by a $0.08 per share margin.

While the huge beat is welcomed news, sales were also up. This was unexpected. Sales came in at $859.1 million and beat estimates by $40.2 million. These sales were up 5% from last year. While the beat is definitely welcomed news, the one indicator that we watch more than any other is same-store sales or comparable sales. Well, we were VERY PLEASED to see comparable sales rise a whopping 4%. So many retailers are getting crushed on comparable sales. Comp sales at Hollister were actually up 8%, but Abercrombie comps were down 2%. The largest takeaway here is that direct to consumer sales were a strong 24% of total sales, furthering the trend of more online shopping. Fran Horowitz, chief executive officer, stated:

“We are pleased by the clear progress across all brands, delivering another quarter of sequential comparable sales improvement, and a return to positive comparable sales. This sales performance in combination with disciplined expense management drove profit growth, despite the promotional environment. Our customers remain at the center of all we do, and that singular focus continues to drive both our brands forward, with effective engagement across all channels driving positive overall traffic and conversion trends. Hollister delivered another quarter of sales growth across all channels and geographies, and Abercrombie is beginning to show signs of stabilization.

We continue to execute on our strategic plan, and we are positioned to compete in what we expect to be a challenging and promotional fourth quarter. We maintain our focus on driving operating expense leverage, while also making strategic investments in marketing and omnichannel to meet our customers’ needs whenever, wherever and however they choose to engage with our brands.”

Looking ahead, it is tempting to buy the stock here as shares are attractive for a mean reversion, and the company is piecing together some decent news. The stock also yields 7% as the name just declared its quarterly dividend of $0.20. So what can move the name higher? Besides the sector as a whole having the tide possibly raise all boats, ANF is reacting to the ever-changing retail landscape. If it can continue to command further sales online it will do well. The trend of online sales exemplifies the changing retail culture. ANF, like so many others, has been in transition to adapt to this change.

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