Abercrombie & Fitch Co. (ANF) followed the trends this week with comp sales gains and solid earnings growth in their fourth quarter results. The stock jumped over 20% in early afternoon trading Wednesday. While I absolutely like what the company is doing, I think that jump makes this one a bit overpriced. I like the dividend, but upside gets diminished if you buy on these gains.
The shift in weeks between 2017 and 2018 results (there were 53 weeks in the fiscal fourth of 2017) put a damper on the revenue gains of the company's sales results. Total fourth quarter sales revenue decreased 3% year over year to $1.2 billion. This sales revenue was affected by a 6% negative effect of a shifted calendar and changes in exchange rates. So in reality, revenues did quite well. Comparable sales increased 3%, demonstrating continued strength in the company with a 59.1% gross profit rate. Including items, operating income did take a hit at $129.7 million vs. $140.3 million a year ago. Excluding those items, operating income was up to $148.4 million on a non-GAAP basis.
GAAP earnings per share increased 35% year over year to $1.42 per diluted share. For the full year, GAAP earnings increased to $1.08 vs. $0.10 per share in 2017. The disparity here is largely in regards to the fact that 2017 was not a good reporting year for Abercrombie on a GAAP basis. On an adjusted basis, diluted earnings increased 76% to $1.15 per share vs. $0.65 the year prior.
The full year earnings represent a strong rally in performance that has been lacking in recent years. Between fiscal 2014 and 2017, Abercrombie experienced revenue declines along with shrinking net incomes. Bottoming out in fiscal 2016, the company has been working to rejuvenate the growth, an act that it has successfully been doing. The year's sales increased 2.8% to $3.59 billion. Yes, that includes the loss of an extra fiscal week. Gross profits rose 3.6% to $2.16 billion, while operating income gained 76% to $127.37 million. That's 3.5% of net sales vs. 2.1% in 2017. I'm a stickler for operating income, and like seeing this improvement on an annual basis.
Long term liabilities are increasing slightly as the company borrows more money, but I like the cash position and overall equity. Cash/equivalents are up 7% to $723.14 million. Relative to their size, that seems like more than enough cash to maintain healthy operations in the event of a problem.
The company successfully regained revenue growth, but the improving earnings to shareholders are resultant of share buybacks and more prudent cost management than anything else. ANF's 2018 revenues are still well below the $3.74 billion achieved in 2014. The earnings strength stemmed from a lower overall share count, and improved operating margins. Moving forward, the company has to demonstrate the ability to continue that trend.
Forward guidance suggests that sales growth can continue at current rates. The company has full year 2019 net sales increasing at 2%-4%. That would be in line with the way things went in 2018 if not a little stronger. The company did not provided EPS guidance, but analyst estimates seem to expect around $1.11 per share. To be conservative, we'll value the stock off of trailing earnings. Abercrombie's stock is trading at about 22.6x trailing earnings. While that's not bad, it's not cheap either. I think you have to really like the 3.75% dividend in order to take on shares. The company is doing well, but it's just a little expensive for my taste when we're this far along in the economic cycle. Clothing is a very trendy business, and I don't really like the idea of paying a premium for it. I'd rate ANF as a hold.
