Abercrombie & Fitch Co.’s (ANF - Analyst Report) shares plunged nearly 11% in the pre-market trading session after the company reported dismal first-quarter fiscal 2016 results.

The company’s quarterly adjusted loss per share of 59 cents was wider than the Zacks Consensus Estimate of a loss of 50 cents and the prior-year quarter loss of 53 cents. Results for the quarter included nearly 5 cents per share impact from adverse currency exchange rates.
 
Including certain one-time items, Abercrombie reported loss per share of 91 cents in the year-ago quarter.

Quarter in Detail

Net sales were down nearly 3% year over year to $685.5 million and missed the Zacks Consensus Estimate of $706 million. The decline in net sales reflects a 5% drop in domestic sales to about $425.4 million and nearly flat international sales of $260.1 million. Also brand-wise, sales for the company’s Abercrombie brand dipped 5% to $323.3 million while Hollister brand fell 2% to $362.1 million.

Further, net sales of the company received 24% contribution from its direct-to-consumer and omni-channel businesses in the reported quarter.

Comparable store sales (comps) dipped 4% owing to lower traffic, particularly in international stores as well as in its U.S. flagship and tourist outlets. Brand-wise, Abercrombie’s comparable sales decreased 8%, while that of Hollister were flat.

Adjusted gross margin expanded 100 basis points in constant currency to 62.1%, mainly backed by higher average unit retails and partly offset by higher unit costs.

Financials

Abercrombie ended the quarter with cash and cash equivalents of $491 million, long-term borrowings of $285.9 million, and shareholders’ equity of $1,254.8 million. As of Apr 30, 2016, inventories were $435.7 million, down nearly 1.2% from the prior-year quarter.

On May 20, management declared a quarterly cash dividend of 20 cents per share, payable on Jun 13, to shareholders on record as of Jun 3, 2016.

Store Update

During the fiscal first quarter, the company introduced three stores, including one U.S. namesake and two international Hollister stores. Also, the company closed 10 domestic stores. With this, the company operated 745 stores in the U.S. and 180 stores across Canada, Europe, Asia and the Middle East, as of Apr 30, 2016.

In fiscal 2016, the company plans to launch 15 stores, comprising 10 stores in international markets, specifically in China, and five domestic stores. Additionally, the company plans to open about six outlet stores in the U.S. Apart from this, the company intends to pull down shutters on approximately 60 stores in the U.S.

Outlook

Following the dismal fiscal first quarter, the company expects the fiscal second quarter to remain challenging. However, the company expects trends to improve in the second half of the fiscal, driven by investments in marketing, store management and omni-channel.

Consequently, the company expects comps to be challenging in the fiscal second quarter, though it remains optimistic about an improvement.

For 2016, the company expects adverse currency effects to impact sales by nearly $10 million and operating income by $15 million, which includes year-over-year hedging impacts as well. Also, gross margin is expected to increase slightly from last year to 61.9%, while the same is expected to witness a modest decline in the fiscal second quarter.

Operating expenses are estimated to be flat with fiscal 2015 levels, based on increased investments in marketing, store management and omni-channel. However, the company’s cost savings from expense reduction initiatives will help offset the higher operating expenses. Based on the timing of these investments, fiscal second-quarter operating expenses are expected to increase 2% to 3% year over year.

The company also reiterated its capital expenditure guidance at the range of $150–$175 million, directed toward store openings and updates, direct-to-consumer and technological initiatives for fiscal 2016.

Zacks Rank & Key Picks

Abercrombie currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include The Children's Place Inc. (PLCE - Snapshot Report), with a Zacks Rank #1 (Strong Buy), and Destination XL Group Inc. (DXLG- Snapshot Report), holding a Zacks Rank #2 (Buy). Another favorably ranked stock in the related industry is Delta Apparel Inc. (DLA - Snapshot Report), also holding a Zacks Rank #2.