A&F Upbeat on Year Ahead, But Stock Plummets
Big stores are not in the cards as the company downsizes and remodels locations, and sets flagship closings.
By David Moin on May 29, 2019
Abercrombie & Fitch Co., showing narrowing losses and modest comparable-sales gains, got off to a good start this year and it’s likely to get better in the back half. That didn’t stop Wall Street from hammering its shares, however.
“I’m proud of how we did in the first quarter,” chief executive officer Fran Horowitz told WWD. “The brands have become increasingly differentiated in their product, voice and experience.
“We delivered what we said we would deliver and we went from negative to positive comps at Abercrombie & Fitch, which was a real testament to the team.”
Earlier on Wednesday, A&F reported that its loss shrunk to $19.2 million in the first quarter ended May 4, from $42.5 million in the year-ago period.
Net sales increased to $734 million from $731 million, including the adverse impact from changes in foreign currency exchange rates of about $16 million or 2 percent.
Overall comparable sales rose 1 percent. Hollister posted a 2 percent comp gain, with total sales up slightly to $432.63 million from $428.45 million in the year-go period. The division did best in guys’ jeans, pants, fleece, outerwear and sweaters. Girls did best in outerwear and bottoms.
The Abercrombie & Fitch division posted a 1 percent comp sales gain, with total sales slipping slightly to $305.52 million, from $307.27 million. After a disappointing fourth quarter when comps were negative on misses in women’s top and dresses, “the teams quickly identified the opportunities and took advantage of our agile supply chain to update spring deliveries wherever possible,” Horowitz said. “We have confidence in the assortment. Our playbook is working.”
It’s typical for the $3.6 billion Abercrombie & Fitch Co., which targets kids to those in their mid-twenties, to lose money in the first quarter and make up for it during the back-to-school and holiday seasons. For 2019, A&F expects net sales growth of 2 to 4 percent and comparable sales to be up in the low single-digit range. Abercrombie Kids targets ages 5 to 14; Hollister appeals to teens, and the A&F division focuses on twentysomethings.
The big picture centers on the retailer’s multiyear transformation, now in its second year. It largely involves ongoing flagship closings, as well as store remodels and downsizings.
The transformation also involves optimizing marketing and social media; enhancing digital omnichannel capabilities and increasing the speed and efficiency of developing and bringing products to market, and getting more adept at “chasing” reorders on products in demand.
Despite signs the company is continuing to strengthen and executives expressing a bright outlook, A&F’s stock fell 26.5 percent in trading Wednesday to close at $18.39 on a day when the stock market plummeted by more than 200 points by mid-afternoon. News that three more flagships would close, continued downsizings of existing units and modest sales results and expectations, as well as concerns over tariffs and the economy could have disappointed investors.
In the last two years, 35 stores were downsized by close to 35 percent each, though Horowitz said that’s led to increased productivity and earnings before interest and taxes, and lower occupancy costs, while holding up the top line.
Horowitz also cited the “healthy” state of consumers (wages are rising and unemployment is low) and said she’s comfortable with inventory levels. She expects benefits in the back half of 2019 and in 2020 from the company going live with markdown and size optimization systems earlier this quarter.
Still, A&F’s 18 flagship locations continue to be a drag on sales and profits.
The three flagships closing are Hollister in Manhattan’s SoHo neighborhood this quarter; Abercrombie & Fitch in Milan by the end of fiscal 2019, and A&F in Fukuoka, Japan, in the second half of fiscal 2020, bringing the flagship count down to 15. The Copenhagen flagship closed in March. The four flagships represent under 1 percent of revenues. An A&F flagship in Hong Kong closed in December 2017.
Additional flagship closings are expected through lease expirations, kickout clauses and negotiations with landlords, but the company said it’s too soon to disclose any more.
Asked if all of the flagships will eventually close, Horowitz replied, “We look at that case by case. Some are productive. I can’t make a general statement that we are closing all of them. But large, expensive flagships are not part of our future. Our customers are really enjoying more intimate, smaller, omnichannel focused experiences.”
She declined to comment on rumors that the A&F flagship on Fifth Avenue will close.
Horowitz stressed that stores matter. Since the corporation’s transformation strategy began, the company has established 85 new store experiences encompassing opening new units, remodels, relocating existing units, pop-ups, and downsizings reducing stores to 5,000 to 6,000 square feet, from 8,000 to 10,000 square feet.
“While I’m extremely proud of the over $1 billion in digital sales that we achieved in fiscal 2018, we are a modern omnichannel retailer. In this age where it seems like every headline references a retail apocalypse, we continue to invest in our global store base.”
In face of looming tariff hikes and trade war, the company is “agile” in overseas sourcing and ready to reduce dependence on China, Horowitz said.
“Over the past several years, we have been proactively reducing our dependence on China. We’ve had longstanding partners in the region and they too have been shifting production out of China. These relationships provide us the flexibility if we continue to maintain an active and open dialogue with our vendor partners.”
China accounted for 25 percent of A&F’s imports to the U.S. in 2018. “It will be 20 percent or less in 2019,” as sourcing shifts are made.
“We have very strong relationships with the vendor community. Many vendors are themselves moving outside China.” She sees more opportunities in Vietnam and Cambodia,” among the 18 countries that supply A&F. The company recently had a vendor conference in Vietnam with 100 people representing suppliers. “We have a playbook in place if the hypothetical becomes a reality,” Horowitz said.
Asked if shifting sourcing to different countries leads to interruptions in the flow of merchandise, Horowitz said, “We have a very seasoned sourcing team. We have seen no interruption up to this point.”
A&F executives do have other concerns. Mall traffic and tourism in the U.S. continues down, though despite all that, the retailer’s business in the U.S. was 4 percent ahead last quarter, on a comp basis.
But the international business was down 4 percent, with consumers in Asia rejecting certain styles. Executives said the company is underpenetrated in key markets in Europe and China, where teams are being built out.
“We have not been immune to the mall traffic trends seen in post-Easter,” Horowitz said. “We believe that the U.S. consumer, which makes up the majority of our sales, remains healthy. Our traffic has tracked above the mall average but we do not operate in a bubble. We anticipate a competitive environment.”