While Tuesday was sell, sell, sell, Wednesday was buy, buy, buy.
After suffering staggering losses early this week on reports that China’s economy is weak even as the policymakers there devalued the yuan and slashed interest rates, U.S. markets rebounded Wednesday as investors shifted focus to corporate fundamentals and a positive durable goods report from the U.S. Department of Commerce.
As cheap stocks were gobbled up, observers noted the rally looked like a “dead cat bounce,” which is not a favorable omen on Wall Street, and might signal ongoing corrections. But for the moment, the rally offered a brief respite from the declining stock values.
In the retail and consumer sector, fashion apparel companies that beat bottom-line expectations Wednesday – Abercrombie & Fitch Co., Express Inc. and Chico’s FAS Inc. – buoyed the segment. The gains followed steep declines in Asian markets and a drop in European equities. Helping to bolster the U.S. market was a sober report from Moody’s that countered investor sentiment regarding the impact of a devalued yuan on companies with exposure in China.
“The renminbi depreciation against the U.S. dollar since Aug. 11 will in itself have no significant credit impact on corporates outside China,” said Tom Marshella, managing director and co-head of Moody’s Corporate Finance Group for the Americas. “While some individual companies are heavily exposed, direct exposure to China is modest for the large majority of corporates in the Americas. Moreover, the depreciation follows a long period of significant appreciation of the renminbi against most major currencies. China will likely continue to make positive, even if slightly reduced, contributions to earnings for most companies that are active there.”
As a result, the Dow Jones Industrial Average jumped 619 points, or 4 percent, to 16,286 while the S&P 500 gained 4 percent to 1,941.
Earlier in the day, the Shanghai Composite Index closed 1.3 percent lower, which was a steadier performance after two days of sharp falls. In Hong Kong, the Hang Seng Index reversed Tuesday’s modest gains by shedding 1.5 percent. Most retail stocks were impacted with some of the biggest fallers of the day being Li & Fung, down 4.4 percent to 4.97 Hong Kong dollars, and Chow Tai Fook Jewellery Group, 3.3 percent to 6.76 Hong Kong dollars. Prada SpA shed 0.9 percent to end the day at 32.10 Hong Kong dollars.
In Europe, the FTSE 100 in London finished down 1.7 percent to 5,979, followed by the CAC 40 in Paris, which lost 1.4 percent to 4,501. The DAX in Frankfurt slipped 1.3 percent to 9,997 and the FTSE MIB in Milan fell 0.8 percent to 21,473.
Fashion, luxury and retail stocks had more of an uneven day in Europe. Those that fell the most were Hennes & Mauritz, 3.4 percent to 322.70 Swedish kronor; Burberry, 3.2 percent to 13.47 pounds; L’Oréal, 2.9 percent to 148.45 euros and Richemont, 2.3 percent to 70.15 Swiss francs.
The few risers included Yoox Group, 0.2 percent to 26.97 euros; Luxottica, 1.7 percent to 60.25 euros and Jimmy Choo, 1.5 percent to 1.68 pounds.
Back in the U.S. the S&P 500 Retailing Industry Group outperformed other indices with a 4.6 percent gain to close at 1,177. The retail sector was strengthened by strong increases for Abercrombie & Fitch, Express and Chico’s, which all beat consensus earnings estimates.
Shares of Abercrombie closed the day up 9.5 percent to $18.91, while Express finished with a gain of 19.8 percent to $20.25 and Chico’s rose 6.6 percent to close at $14.74.
Here, a look at the three retailers’ results:
Don’t call A&F a teen brand
That moniker was described as “disturbing” by Arthur Martinez, chairman of Abercrombie & Fitch, in a telephone interview Wednesday.
To be sure, the specialty chain for the past year has been trying to age the brand to target an “older consumer,” but according to Martinez, it’s less about the actual age range even though the likely spread is between ages 16 and 25. Martinez said the product is attracting a wider range of consumers to the A&F stores, and more recent marketing imagery is showing a slightly older customer, “someone post-high school and post-collegiate.”
For the company, Hollister is the “teen” brand, targeting younger men and women between the ages of 14 and 18. One of the problems in the past had been undifferentiated product between the two brands, but that’s changing. “The separation will get wider and continue to get wider,” Martinez said.
According to Martinez, A&F will be “more sophisticated in styling, a more urban attitude. [The merchandise] has the ability to be made part of dressier wardrobe decisions. Hollister is much more playful, more casual for free time on the weekend.”
Martinez spoke following the company’s posting of second-quarter results that bested Wall Street’s consensus expectations.
While Hollister and abercrombie kids saw a better trajectory in consumer response to the recent adjustments, the A&F brand only saw modest progress in the quarter. Martinez said, “There should be no expectation in anybody’s mind that both brands will progress at the same rate. Each faces different challenges. Turnarounds [do not occur] in lockstep [fashion].”
For the three months ended Aug. 1, the net loss was $810,000, or 1 cent a diluted share, against net income of $12.9 million, or 17 cents, a year ago. On an adjusted basis, excluding certain charges, net income was $8.6 million, or 12 cents a diluted share. Net sales slipped 8.2 percent to $817.8 million from $890.6 million. Comparable-store sales fell 4 percent, with a 7 percent slip at A&F and a 1 percent dip at Hollister. Wall Street was expecting an adjusted loss of 4 cents a share on sales of $811.5 million.
For the second half, the company expects comp-sales trends to improve, as well as continued headwinds from foreign currency exchange rates.
Martinez also said the company has been building back its logo assortment, finally reaching a level during the second quarter that it deemed appropriate for the business. “It was an unfortunate comment from Mike [Jeffries, former chief executive officer] about taking it to near zero, which became a self-fulfilling prophecy,” the chairman said. While logo product is still a relevant part of the assortment and the quality of the product has been upgraded, it’s less dominant as a category than it was when Jeffries was still the ceo, Martinez explained.
Jeffries retired in December 2014. During the conference call to Wall Street analysts, Martinez said, “With regard to a ceo decision, the board remains deeply engaged in this decision,” noting that it is “far better to make the right choice than a hasty choice.”
In another development, Hollister will soon have a new development team in place. The team will report to Fran Horowitz, brand president of Hollister. Martinez said she’s already hired a new head of design, with new hires to follow for head of merchandising and the head of planning and location.
The company earlier this month completed the selection of its leadership team for the core A&F brand, each of whom report to Christos Angelides, the brand president of A&F and abercrombie kids.
Analysts were split in their assessment of A&F’s progress. Jefferies & Co.’s Randal J. Konik said the topline showed “sequential improvement with more progress to come” in the back half of the year. Eric Beder at Wunderlich Securities Inc. said, “We are not convinced that a turn is in effect; today’s results come from cost savings, which we view as not sustainable, or a long-term answer, as management will eventually run out of areas to cut costs and have to grow the business.”
Shoppers expressing fashion fondness at Express
Express, with reduced promotions and strong consumer acceptance to knits, dresses, denim, jackets and boho looks, reported that its net income in the second quarter rose by three times the amount, exceeding analysts’ expectations.
“Our product is on trend and is being well received. The momentum in the women’s business is continuing and men’s is improving,” said David Kornberg, president and ceo, during a conference call.
In the second quarter ended Aug. 2, the net profit at Express tripled to $21 million, or 25 cents a diluted share, compared to $6.9 million, or 8 cents, for the year-ago period. Net sales increased 11 percent to $535.6 million from $481.4 million in the second quarter of 2014. Comparable sales (including e-commerce sales) increased 7 percent. E-commerce sales rose 21 percent to $75 million.
“We delivered record second-quarter sales, operating income and diluted earnings per share,” Kornberg said. He cited “strong fashion supported by brand-focused marketing, an elevated customer experience, and disciplined inventory management.”
During a conference call, executives also cited the One Eleven collection of opening price casual knits and Express Factory Outlets as strong performers. In men’s, the best performances were in casual pants, shorts and suits.
Officials also cited a few rollouts, including the Exp Core performance line, which is being expanded to 100 stores, up from 30. The Express Factory Outlet chain will expand by the end of the year to 80 outlets from the current 65, and this fall customers browsing online will be able to check product availability by store, as part of the chain’s continuing omni-channel initiatives.
For the third quarter, the company expects midsingle-digit comparable sales gains and net income to rise to $22 million to $25 million, from $14.6 million in the year-ago third quarter. Diluted EPS are seen at 26 cents to 29 cents, compared with 17 cents in the year-ago period.
The strong results allowed the company to upgrade its annual EPS guidance to a range of between $1.30 and $1.37 against previous guidance of $1.11 to $1.22 a share.
Express operates more than 600 retail and factory outlet stores, located primarily in high-traffic malls, lifestyle centers, and street locations in the U.S., Canada and Puerto Rico. There are also franchise stores in the Middle East and Latin America.
Chico’s beat, and shutters Boston Proper
Chico’s reported earnings in the second quarter of 25 cents a share, a 25 percent increase over last year and easily beating research firm Zacks’ estimate of 22 cents a share. Revenues of $680.4 million also beat Zacks’ estimate of $675 million and were better than last year’s $671.1 million.
Chico’s also said it plans to sell the Boston Proper direct-to-consumer business and is closing those stores. So far, this has cost Chico’s $16.2 million in restructuring charges.
Comparable sales at the flagship Chico’s were down 0.8 percent for the second quarter, but the drop was offset by Soma lingerie, which increased 5.7 percent and the White House|Black Market chain was flat. “Soma is the ace in the hole for us,” said ceo David Dyer.
The company said the gaucho style of bottom was popular and that even stirrup pants were back. The new style of “Is it” was doing well. The company described that as “Is it a dress or a shirt?”
The company mentioned some new bra launches to come later in the year at Soma on the conference call.
Gross margin improved to $366 million, up from $351.5 million, reflecting less promotional activity due to improved inventory management. The company repaid $26.5 million borrowed against the credit facility.