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Fundamentals of Financial Manageme...

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Eugene F. Brigham + 1 other
ISBN: 9781305635937

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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
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Forecasting the Future Performance of Abercrombie & Fitch

Use online resources to work on this chapter’s questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions.

Clothing retailer Abercrombie & Fitch enjoyed phenomenal success in the late 1990s. Between 1996 and 2000, its sales grew almost fourfold—from $335 million to more than $1.2 billion—and its stock price soared by more than 500%. However, in 2002, its growth rate had begun to slow down, and Abercrombie had a hard time meeting its quarterly earnings targets. As a result, the stock price in late 2002 was about half of what it was 3 years earlier. Abercrombie’s struggles resulted from increased competition, a sluggish economy, and the challenges of staying ahead of the fashion curve. From late 2002 until November 2007, the company’s stock rebounded strongly; however, its stock price declined during the 2008 economic downturn. Its stock price rebounded until late October 2011, when it began a downward trend again. Its stock price started to rise again in early 2013, but has been on a downward trend since that time. Questions remain about the firm’s long-term growth prospects. However, the company has been cutting costs and improving productivity with its focus on the supply chain. In addition, it has been actively repurchasing shares, indicating that management believes its shares are undervalued. The company continues to steadily expand stores abroad while closing underperforming domestic stores.

Given the questions about Abercrombie’s future growth rate, analysts have focused on the company’s earnings reports. Financial websites such as Yahoo! Finance, Morningstar, and MSN Money provide information on the company’s recent earnings history along with a summary of analysts’ earnings forecasts.

Discussion Questions

Based on analysts’ forecasts, what is the expected long-term (5-year) growth rate in earnings?

Annual Financials for Abercrombie & Fitch Co.

View Ratios

Chapter 16, Problem 2DQ, Forecasting the Future Performance of Abercrombie  Fitch Use online resources to work on this , example  1

Chapter 16, Problem 2DQ, Forecasting the Future Performance of Abercrombie  Fitch Use online resources to work on this , example  2

Chapter 16, Problem 2DQ, Forecasting the Future Performance of Abercrombie  Fitch Use online resources to work on this , example  3

Chapter 16, Problem 2DQ, Forecasting the Future Performance of Abercrombie  Fitch Use online resources to work on this , example  4

ITEM 6. SELECTED FINANCIAL DATA.

ABERCROMBIE & FITCH CO. FINANCIAL SUMMARY

(Thousands, except per share and per square foot amounts, ratios and store and associate data)

(Information below excludes amounts related to discontinued operations, except where otherwise noted)

Chapter 16, Problem 2DQ, Forecasting the Future Performance of Abercrombie  Fitch Use online resources to work on this , example  5

Summary Introduction

To calculate: The expected long-term (5-year) growth rate in earnings.

Introduction:

Earnings:

Earnings refer to the net income of a company that the company has itself to pay off to its shareholders as dividend. Earning is the amount of profit that a company generates from its operation in a particular period.

Explanation

Calculation of long term (5–year) growth rate in earnings,

Given,

The sum of growth rate of 5 years in earnings is (-46.306).

Numbers of years are 5 years.

Formula to calculate expected long term (5-year/0 growth rate in earnings,

Longterm(5years)growthrateinearnings=Sumofgrowthrateof5yearsNumberofyears

Substitute (-46.306) for sum of growth rate of 5 years and 5 for number of years.

Longterm(5years)growthrateinearnings=(46.306)5=(9.2612)%

Working notes:

Calculation of earnings growth rate of the year 2013-2014

Given,

The net income of Company A for the fiscal year ended 2013 is $54,628,000.

The net income of Company A for the fiscal year ended 2014 is $54,630,000.

Calculation of net income growth rate,

Netincomegrowthrate=[(Netincomefor2014Netincomefor2013Netincomefor2013)×100]=[($54,630,000$54,628,000$54,628,000)×100]=$2,000$54,628,000×100=0.004%

Calculation of earnings growth rate of the year 2014-2015

Given,

The net income of Company A for the fiscal year ended2014 is $54.630.000.

The net income of Company A for the fiscal year ended 2015 is $51,820,000.

Calculation of net income growth rate,

Netincomegrowthrate=[(Netincomefor2015Netincomefor2014Netincomefor2014)×100]=[($51,820,000$54,630,000$54,630,000)×100]=$(2,810,000)$54,630,000×100=(5.14)%

Calculation of earnings growth rate of the year 2015-2016

Given,

The net income of Company A for the fiscal year ended 2015 is $51,820,000.

The net income of Company A for the fiscal year ended 2016 is $35,580,000.

Formula to calculate the net income growth rate,

Netincomegrowthrate=[(Netincomefor2016Netincomefor2015Netincomefor2015)×100]=[($35,580,000$51,820,000$51,820,000)×100]=$(16,240,000)$51,820,000×100=(31

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