Abercrombie & Fitch Ready to Buy a Brand

David MoinWed, March 3, 2021, 3:49 AM·6 min read wwd

Abercrombie & Fitch Co., flush with cash and coming off a respectable finish to a difficult COVID-19-impacted 2020, is considering a brand acquisition. “Essentially, we are in a position of strength. We are on the offense,” Fran Horowitz, A&F’s chief executive officer, told WWD. “Acquisitions are an opportunity on our list,” Horowitz said Tuesday, just after the company reported fourth-quarter net income came in at $82.4 million, or $1.27 a share, slightly under the $83.1 million, or $1.29 a share, posted in the year-ago period. Net sales were down 5 percent to $1.1 billion last quarter, from $1.18 billion in the year-ago quarter. Digital sales, which rose 34 percent to $639 million, as well as tight expense controls, helped lift the business. Asked if A&F would seek a brand catering to a demographic or a category that it doesn’t already cover, Horowitz replied, “Most likely it would be in an adjacent category.” Hollister caters to teens while Abercrombie caters to young Millennials. A&F currently doesn’t sell wellness, home, or high-tech performance wear, and has limited footwear and active offerings. Asked if any of those categories would be targeted, Horowitz replied, “It’s hard to say at this point.” “We see companies come across our desk all the time that are up for sale,” added Scott F. Lipesky, chief financial officer.

Lipesky later said during a conference call that there’s room to further grow the company’s core brands — A&F, Hollister, Gilly Hicks and Abercrombie Kids — but folding in new brands “could be an additional accelerant.” It’s possible the company decides to develop another in-house brand, the strategy used to launch Hollister and Gilly Hicks years ago. A&F Co. ended the fiscal year with $1.1 billion in cash and cash equivalents, compared to $671 million a year ago. Fourth-quarter operating income came to $116 million in the quarter ended Jan. 30, compared to $122 million in the year-ago period. On an adjusted basis, operating income was $131 million last year compared to $125 million in the year-ago period. By division, Hollister’s sales were down 8 percent last quarter to $655.4 million from $710.5 million a year ago. Abercrombie’s sales were down 2 percent to $466.6 million from $474 million in the 2019 period.

“I am proud of our execution in the fourth quarter, where we exceeded initial internal expectations,” said Horowitz, in a statement. “We listened and remained close to our customer, adjusting our product and messaging to align with their new reality. We drove 34 percent digital sales growth, expanded gross profit rate by 230 basis points and reduced operating expense during the fourth quarter. For all of last year, A&F lost $114 million, compared to a profit of $39.4 million in 2019. Net sales last year reached $3.1 billion, down 14 percent compared to $3.6 billion in 2019. Digital sales increased 39 percent to $1.7 billion.

“For the year, we made significant progress on our key transformation initiatives,” Horowitz said. “We leaned into our infrastructure to grow digital to 54 percent of annual revenues while utilizing our lease flexibility to take approximately 1.1 million gross square feet, or 17 percent, out of our base, including eight tourist-dependent flagships. At the same time, we continued to make strategic investments to support future growth including opening smaller, more omni-enabled experiences; adding senior level talent in key areas including marketing, data and analytics and digital, and further building out regional teams in EMEA and APAC. We remain focused on controlling what we can control and ended 2020 even stronger than we started.” Horowitz also said A&F has shifted to a digitally led business model, with digital sales last quarter accounting for 54 percent of the volume. The company has set a $100 million capital expenditure budget for 2021, about half of which will be spent on the digital operations. In digital, “the most important investment is in the experience,” Horowitz said, noting that last year, the company shored up talent in the company’s user and data analytics teams.

“The core thing is being an omnichannnel business. There has to be a blend. We are super excited about the progress we made in the digital business last year,” said Horowitz, adding that as additional stores reopen around the world, vaccinations roll out and consumers return in greater numbers to shopping malls, the balance of digital versus brick-and-mortar sales would change. “Twenty-twenty-one will be a year of learning,” Horowitz said. Abercrombie’s 2021 performance stood out in light of how other retailers selling “nonessentials” performed, several already reporting steep revenue and profit declines. Horowitz outlined A&F’s differentiators giving it an edge, citing a demand for A&F products that outpaced inventory, a flexible open-to-buy with weekly buying so the company can “chase” products in particular demand, and the ongoing and aggressive rationalization of the store fleet by reducing the flagship count, increasing the count on smaller stores, which are designed to be more productive, less costly and omnicapable stores and catering to local shoppers, unlike the flagships, which have been tourist-driven, costly and overspaced.

“The most important thing is the edit,” said Horowitz. “You would remember that the brands were once very similar. We have spent years making sure those brands were pulled apart so they are on their own paths.” With social media, Horowitz characterized A&F as “leading in that particular function relative to our competitors. We engaged with our consumers early on through back-to-school and holiday. It’s creating a whole new halo over A&F’s brands. Most of A&F’s social media is conducted through TikTok with influencers Charli and Dixie D’Amelio, and Instagram, which have become selling tools. Regarding her outlook for 2021, Horowitz underscored “uncertainty,” partly to due to how COVID-19 and the vaccinations play out, and to what extent and at what pace the company’s closed stores reopen and those that are open return to normal operating hours. In Europe, there is a significant fleet of Hollister stores, two thirds of the base is closed due to the health crisis, while in the U.S., all stores are open though many are operating with limited hours and with limited crowd capacity. Bestsellers last quarter at Hollister were “match-back” fleece tops and bottoms, sweatshirts and sweatpants. Abercrombie’s bestsellers included knits, sweaters, outerwear, jeans and dresses. Gilly Hicks did best with cozy tops and bottoms and activewear.

Last year, 25 stores were opened, including 15 new locations, four remodels and six units that were right-sized. According to Lipesky, there will be more than 25 openings this year, but he didn’t specify a number. A&F closed eight flagship locations during fiscal 2020, leaving seven flagships remaining. In addition, the company closed 129 nonflagship locations during fiscal 2020. These actions reduced total company gross square footage by 1.1 million gross square feet, or 17 percent, as compared to fiscal 2019 year-end.

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