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Abercrombie & Fitch Co. (ANF) Q1 Earnings Preview: Well Positioned At The Margins

 May 23, 2013 02:48 PM

(By Rich Bieglmeier) Abercrombie & Fitch Co. (ANF) will be holding its quarterly earnings conference call for all interested parties on May 24, 2013, at 8:30 a.m. ET.  The first quarter earnings press release is scheduled to cross the wire shortly after 7:00 a.m. ET.

Wall Street anticipates that ANF will lose $0.05 for the quarter. iStock expects the specialty retailer to report earnings that will miss Wall Street's consensus number. The iEstimate is -$0.07, a two cent downside surprise.

[Related -Abercrombie & Fitch Co. (ANF) Q3 Earnings Preview: A Cold November Rain?]

Abercrombie & Fitch Co., through its subsidiaries, operates as a specialty retailer of casual apparel for men, women, and kids. It operates through three segments: U.S. Stores, International Stores, and Direct-to-Consumer.  As of February 2, 2013, the company operated 912 stores in the United States and 139 stores internationally.

Missing the mark is an unusual event for the controversial retailer. In the last four years, Abercrombie has failed to meet Wall Street's consensus number only three times, hit the mark twice, and topped expectations 11 of the last 16 quarterly EPS announcements.

On average, ANF runs past the street's outlook by a nickel, a typical bullish surprise of a dime and missing by an average of 13%.

[Related -Abercrombie & Fitch Co (ANF): Lack Of Visibility May Keep Investors On Sidelines]

Beat or miss, Abercrombie & Fitch tends to swing, big, in the three days bookending the quarterly profit checkup. The stock price suffered seven earnings driven losses, dropping an average of 12.41% while the remaining nine reports held hands with an average gain of 9.93%. Being on the right side of ANF's move can be rapidly rewarding.

Considering historical swings during earnings time, option players could provide some insight as to which direction speculators are betting on ANF taking post-EPS. Uncertainty reigns based on today's June call/put volume ratio, which stands a 1:1. Meanwhile, open interest for the Pearl month favors bulls by 2:1. Based on today's most heavily traded options, the people in the pits appear to be putting a post-EPS price range of $46.87 to $57.16 on ANF – look out below.

In the past two weeks, Target (TGT) and Wal-Mart (WMT) revised their outlooks downward based on consumer trends. At the same time, Retail Sales figures declined sharply following a strong February. The current environment is not ideal as consumer confidence is slipping.

Fortunately, for ANF shareholders, the company is  in good shape to hold or improve on margins according to the latest 10 filing. Revenue for 2012 increased by 8.5% while costs increased at a slower pace of 5.4%, accounting for 37.6% of sales in 2012 versus 38.7% in 2011. If costs can continue to decline as a percentage of sales, margins improvement could add a penny or two to the bottom line.

We see hope for strong margins with inventory control. Inventories fell 37.2% in 2012 compared to 2011, which could mean Abercrombie didn't have to rely on too heavily on discounts or sales to move product from the cash register to closets; again, another potential boost to margins.

Overall: The retail environment might work against retailers, and out iEstimate suggests Abercrombie & Fitch Co. (ANF) could be no different; however, iStock's cursory review of the apparel stores chain does open the door to a potential upside surprise on better than expected margins.

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