For those of us who are fans of good companies at bargain prices, the past few months of market action have been brutal. Finally, a break has arrived.
No offense to owners of Abercrombie & Fitch (NYSE:ANF), but I've been doing a little rain dance every day, hoping to douse this parade. I've wanted shares a bit cheaper, and maybe I'll soon get the chance.
The stock is down 5% today on what I think is a very fine earnings report. Here's the news brief: Total revenues were up 22% for the quarter, to $864 million. Net income was up 43% with EPS up 41% to $1.11 per share.
Now, that's not as spicy as the quarter that American Eagle Outfitters (NASDAQ:AEOS) put up yesterday, sending shares up a couple of percent .
Wait a minute . sure it is. In fact, in terms of sales growth and profits, it was slightly better. So why is Mr. Market punishing Abercrombie today?
I have a few theories. One is that the market likes a horse race, and American Eagle seems to be pulling ahead, at least in same-store sales growth and stock returns. My own view is that the success of either is not mutually exclusive. PepsiCo (NYSE:PEP) and Coke (NYSE:KO) compete, but both thrive. Despite the similarities, I see no reason that these two can't coexist and prosper.
Another reason may be worries about margins. I've seen some grousing about the 20-basis-point drop in gross margins, owed to discounting. But getting worked up about this is a mistake, since the drop was offset by a 20-basis-point improvement in store and distribution expenses.
In fact, the only reason we're able to notice the slight waggle in gross margins is because Abercrombie accounts for gross profits differently from most of its peers, excluding certain buying, home-office, and occupancy costs that are usually included in cost of goods sold. In other words, where other companies could simply have provided a flat gross margin picture, Abercrombie's giving us more information, and it's really not that bad.
Instead, I say, look at the operating margins: up 2.4 percentage points. Net margin up 1.7 percentage points. If that's a slap-worthy performance, I'll take all the slapping I can get.
My vote for the most likely reason that Abercrombie's getting the cold shoulder is the guidance it issued for "flat" same-store sales for the upcoming quarter. That's not very exciting, nor is the company's reaffirmation of full-year profit guidance of $4.59 to $4.64 per share. But Mr. Market is way too obsessed with comps. This quarter's same-store sales growth came to only 5%, but that didn't stop the company from leveraging much better profits. I think it can continue to do that, even without the torrid comps growth that Wall Street demands.
If it takes the Street too long to realize that, I'll be waiting for cheap shares, cash in hand.
American Eagle Outfitters is a Motley Fool Stock Advisor pick. To take a look at the reasoning behind the recommendation, try a free guest pass.
At the time of publication, Seth Jayson had shares of American Eagle, but no positions in any other company mentioned here. View his stock holdings and Fool profile here. Coke is a Motley Fool Inside Value recommendation. Fool rules are here.
