Abercrombie & Fitch Posts Strong Start to Year
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Abercrombie & Fitch Co. posted another solid quarterly report and has raised its outlook for the year despite the volatile economy.
Net income for the quarter ended April 29 rose 2 percent to $16.57 million from $16.47 million in the year-ago period.
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Operating income reached $34 million and $38 million on a reported and adjusted non-GAAP basis, respectively, as compared to an operating loss of $10 million and $6 million last year, on a reported and adjusted non-GAAP basis, respectively.
Net sales rose 3 percent to $836 million, compared to $812.76 million in the year-ago period. Comparable sales rose 3 percent.
Wall Street reacted strongly to the report, sending A&F’s stock price up 31 percent, or $7.15, to $30.16, at the close of the stock market Wednesday.
“We’ve been on this amazing journey to evolve from a jeans and T-shirt business to being so much more than that today. Fran Horowitz, chief executive officer of Abercrombie & Fitch Co., told WWD on Wednesday, after the company released its first quarter report. “Customers are coming to us for so much more than what the brand originally stood for,” said Horowitz, whether that’s for office attire, going out or more dressed up situations.
The Abercrombie brand, which targets Millennials, is “on fire,” posting a 14 percent comp gain on top of last year’s 13 percent gain, Horowitz said.
At Hollister, “the top line is not where we want it, but Hollister is back to being profitable, AUR [average unit retail price] is up, and inventory is under control,” Horowitz said.
Hollister targets the teen market which started to drag during the 2022 back-to-school season. Families with teenagers have been under greater financial pressure than other population sectors, dealing with inflation and education costs. “Consumers are being more judicious about their spending,” Horowitz observed.
Bestsellers across both brands include dresses and non-denim bottoms particularly cargo pants and trousers.
“Fiscal 2023 is off to a strong start with first-quarter net sales and operating margin above our expectations,” Horowitz said in her prepared statement. “Net sales grew 3 percent to last year, led by Abercrombie brands where we grew 14 percent, achieving the highest first-quarter sales in more than a decade. Abercrombie’s offering is resonating meaningfully with our target customer, setting several other sales records this quarter across genders, categories and geographies.
“Work continues in Hollister brands, where we managed a healthy business from a gross profit rate and inventory perspective and continued to improve the assortment as we prepare for the summer and back-to-school seasons. Both brands were able to deliver year-over-year AUR growth and lower freight costs, driving 570 basis points of gross profit rate improvement and a first-quarter operating profit above our expectation.”
Overall, inventory was down 20 percent.
“Looking ahead, we remain cautiously optimistic on consumer demand and our ability to react to a dynamic macro environment, further supported by our strong balance sheet,” said Horowitz. “We are managing inventory tightly and each brand is in a position to chase demand. Importantly, we are progressing on key, strategic investments across stores, digital and technology to deliver growth on both the top and bottom lines from 2022 levels consistent with our Always Forward Plan.”
By brand, Abercrombie sales, which includes the Abercrombie and Abercrombie Kids brands, rose 14 percent to $436 million from $383.9 million in the year-ago period, though Hollister sales declined 7 percent to $399.9 million from $428.8 million. Hollister results include the Hollister, Gilly Hicks and Social Tourist brands.
The company raised its outlook for 2023, projecting net sales growth in the range of 2 to 4 percent from $3.7 billion in 2022. This is an increase on the previous outlook of up 1 to 3 percent. The current outlook assumes that Abercrombie will continue to outperform Hollister and the U.S. will continue to outperform International. Also, fiscal 2023 includes a 53rd week for reporting purposes, along with net store expansion. The 53rd week is estimated to add about $45 million to total net sales in the fourth quarter and full year of 2023.
The retailer is also benefitting by what its executives described as its heightened ability to “chase” trends and items that are hot, meaning get the reorders quickly when the demand is there. “Stability in the supply chain has made it easier,” to chase products, said chief financial officer Scott Lipesky. “There’s more air capacity where rates have come down and we’re running inventories lean.” Lower inventories also enable the company to be more agile.
Operating margin is expected to be in a range of 5 to 6 percent, compared to the previous forecast of 4 to 5 percent. The current outlook includes a benefit of around 250 basis points from full-year 2022 levels on expected net improvement in freight and raw material costs, partially offset by modest operating margin deleverage from the combination of inflation and increased operating expense investment for the 2025 Always Forward Plan initiatives, including an upgrade of the company’s retail merchandising ERP system.
For the second quarter of fiscal 2023, the company expects net sales growth in the range of 4 to 6 percent compared to fiscal second quarter 2022 level of $805 million. Operating margin is seen in the range of 2 to 3 percent compared to breakeven in second quarter 2022.
In other financial results, A&F reported that inventories totaled $448 million, representing a decrease of 20 percent compared to the year-ago period.
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