A&F Posts Strong Q1; Proceeds Cautiously for B-t-s

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Abercrombie & Fitch Co., which swung into profitability for the first quarter, is emerging from the pandemic “stronger and nimbler” and benefiting from an apparent attitude adjustment by consumers.

“I do believe there is a healthy consumer out there today that is willing to pay full price,” Fran Horowitz, A&F’s chief executive officer, told WWD, just after the company reported first-quarter net income of $41.7 million, compared to a loss of $244.2 million in the year-ago period.

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“It’s a true pivot point for the retail industry to go from a ‘wait-for sale’ mentality to a ‘buy-it-now’ mentality. It’s incredibly exciting to see that happening,” Horowitz said, underscoring that last quarter was marked by growth in AUR (average unit retail price) and margins, and significantly reduced promotions.

For decades, the retail industry has been consumed by intensifying price promoting and deepening markdowns, with no clear way out of it. But COVID-19, changing consumer shopping patterns and attitudes, and conservative inventory management are creating an opening for retailers.

“I do think there is an opportunity for a reset, particularly at Abercrombie & Fitch,” Horowitz said. She said her company is keeping inventories lean, thereby reducing the need for discounting while increasing the rate of full-price selling. Consumers are learning that if they hesitate to make a purchase, what they want may not be available in the immediate days ahead.

Horowitz pointed to A&F’s gross profit rate, which improved 900 basis points to 63.4 percent of sales, driven by higher average unit retail on lower promotions, from 54.4 percent of sales a year ago.

Asked if the full-price selling trend can be sustained, Horowitz said, “The goal is to stick with the disciplines,” meaning continued inventory controls and continuing to produce product and messaging that resonates with consumers. She also said the company is able to “chase” product when the demand arises.

“Product is always number one and inventory is number two. We are seeing exceptional change because of the work we have put in,” Horowitz said in the interview. Over the last several years, the corporation has raised quality standards, become more inclusive and less sexualized in its marketing and imagery, curtailed logo-ing, and closed oversized and expensive flagships around the world. The Abercrombie flagship on Orchard Road in Singapore closed in the first quarter, leaving six operating flagships, down from seven at the beginning of the year and 15 at the beginning of fiscal 2020.

It’s also made significant inroads in social media, and just last week launched Social Tourist, a new brand at the Hollister division targeting Gen Z’s digital-first mind-set and created in collaboration with social media personalities Dixie and Charli D’Amelio. Social Tourist includes men’s and women’s T-shirts, fleeces, dresses, skirts, swimwear, socks, hats and water bottles across four distinct categories: dual gender, trend pieces, basics and swim. Horowitz said early reaction to the brand was “amazing,” though no specifics on the first-week results were given.

In the past, officials have suggested the possibility of an acquisition to expand the portfolio of brands. Asked if with the advent of Social Tourist, an acquisition is still on the table, Scott Lipesky, chief financial officer, said, “It’s something we think about. We have the financial capacity to do it. But today it’s not a top priority.”

The strong quarterly results lifted A&F’s stock price which closed Wednesday up 7.8 percent or $2.97 to $41.02.

Aside from strong product acceptance, particularly in denim and dresses, the first quarter was marked by strong digital growth. Digital sales increased 45 percent to $403 million, reflecting robust growth in every month of the quarter, the company said. Digital sales represented 52 percent of total sales, which rose 61 percent to $781 million compared to last year’s period.

Operating income for the three months ended May 1 reached $57 million and $60 million on a reported and adjusted non-GAAP [generally accepted accounting principles] basis, respectively. That compared to an operating loss of $209 million and $166 million last year, on a reported and adjusted non-GAAP basis, respectively.

Around the world, the company continues to be impacted by the pandemic, with between 30 and 35 stores still closed, primarily in Canada and Germany, though stores in Germany are open on a by-appointment basis. “Throughout the world, we are still not operating at full capacity,” Horowitz said, noting restrictions vary depending on the city. “It really hasn’t normalized or returned to a new normal” yet, the CEO observed.

Following the recent permanent closing of the Abercrombie & Fitch flagship in London (as part of the multiyear strategy to shed flagships), a smaller store on Regent Street is expected to open sometime in the back half of the year, Lipesky said.

Horowitz said she is hopeful for the back-to-school season, and during an earlier conference call with retail analysts did not mince words regarding the headwinds confronting retailing. “There is definitely inflation in every mode and channel and also delays in getting product. We do expect to see cotton prices pick up. That puts more importance on the AUR side of the business.”

Horowitz also cited some labor inflation and some shortages in certain markets around the country. “We are managing on a city-by-city basis.” Rising costs, however, to some degree are being offset by the greater full-price selling and lowering store occupancy costs, as a result of flagship closings and downsizings.

At the A&F brand, “We achieved our best first-quarter revenues since 2008 and third-largest first quarter in brand history. Women’s in particular truly had a breakout moment, the kind rarely seen in my 30-plus years as a merchant,” the CEO said. Bestsellers included jeans, dresses, intimates and swim.” A&F men’s fared best with jeans, shorts and swim, she added.

At Hollister, Horowitz cited girls’ fleece, dresses, knit tops and bottoms and jeans as bestsellers; for boys, soft and cozy knit bottoms were bestsellers. At Gilly Hicks, activewear, lounge and fleece did best.

Horowitz said “2021 is off to a strong start. We built on the significant progress we made in 2020, registering our best first-quarter operating income since 2008. The first quarter is evidence that our shift to a digitally led global business model is working.…We remained focused on funding key investments in customer-facing initiatives and delivered significant first-quarter operating leverage.”

Horowitz also said sales growth was achieved despite the reduction of 1.3 million gross square feet of store space, or 20 percent, compared to the first quarter of 2019.

“Momentum has continued into the second quarter across brands,” Horowitz said in a statement.

Other retailers in the U.S., including Macy’s and Nordstrom, have been reporting momentum in the first quarter of this year due to the rollout of COVID-19 vaccinations and decline in COVID-19 cases, some pent-up demand, and people starting to go out more. Store traffic is picking up but still very much down from 2019 levels.

By division, Hollister sales rose 62 percent to $442.4 million in the quarter from $273 million in the year-ago period. Abercrombie sales rose 60 percent to $339 million from $212.35 million in the year-ago period.

“Our solid foundation and strong liquidity position enables us to be on the offense,” Horowitz said. “We remain focused on profitable top-line growth, our ongoing digital evolution and our growth vehicles, including Gilly Hicks, and are committed to thoughtful expense management and global square footage optimization. Although the global landscape remains uncertain, I am excited about the future and more confident than ever in our ability to drive sustainable, long-term operating margin expansion.”

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