Hollister Helps Abercrombie Beat Estimates

In a surprising development, teen retailers this time around have not done as badly as anticipated. Abercrombie & Fitch (NYSE:ANF) joined a list of retailers, including American Eagle, Urban Outfitters, Gap, and Express, that have beaten both top and bottom line expectations. While the results may not have been great, and the expectations itself had been muted, this small sign of a recovery has sent the stock prices of these companies soaring. Abercrombie’s share price was up 16% on the results announcement.

The company reported a 0.5% decline in sales, and a 1% fall in its comparable sales growth, but an improvement in its earnings per share – loss of 16 cents, as compared to a loss of 25 cents in the prior year quarter. Sequentially, the comps have improved by brand and by geography. Given this improvement, the back half of the year may result in positive comps growth. A&F estimates a growth in this metric to be approximately flat to up slightly in the second half. While the retail environment continues to remain challenging, the company has undertaken efforts to improve their product assortment, perk up their investments in marketing and omnichannel, and optimize productivity. All these steps bode well for a more upbeat second half. Below we’ll highlight some factors that will impact the earnings of the company in the forthcoming quarters.

1. Hollister

The brand continues to perform strongly amid a tough retail environment. The brand built on the momentum it had gathered in the past few quarters, growing its comps by 5% and its sales by 6%. While A&F’s comps are improving sequentially, they are still in the negative territory. As can be seen in the chart below, the third quarter of FY 2016 seems to be the turning point for the comps. While Hollister’s recovery started in the quarter prior, for the namesake brand and the whole company, the comps have trended better since Q3. Changes to the assortment have been a factor driving the growth at Hollister, as well as its lower-priced products as compared to A&F. Its Club Cali loyalty program continues to do well, and attract new customers. The program has grown to 6.6 million customers by the quarter-end, who get to make use of the members-only events.

2. Denim

Denim is a segment that has been highlighted as a growth driver for many teen apparel companies in the second quarter, including Gap and American Eagle. ANF noted a record performance in denim this quarter in both genders. Stretch denim is the latest trend in this space, and the company’s strong collection seems to be doing well. The existence of this trend ensures growth will continue in this segment for the remainder of the year as well.

3. Intimates And Swimwear

Victoria’s Secret’s loss seems to be A&F’s gain. The former discontinued its swimwear line, and has suffered from comps decline ever since. Abercrombie on the other hand witnessed aggressive growth in its Swim and Intimates line, with Gilly Hicks continuing to attract new customers to the Hollister brand. The Gilly Kicks brand was relaunched in the beginning of 2017, and seems poised for success in the future. Even for American Eagle, its lingerie and activewear brand – Aerie – has been its best performing segment for a while now, demonstrating tremendous growth in this field.

4. New Store Prototype

The company carried on with its new prototype store rollout, with stores that have a reduced footprint opening in a number of locations in the quarter. Seven new A&F prototype stores will be opened this year, including four which will involve downsizing. ANF is also aggressively undertaking its store closure program. Since 2010, over 400 stores have been closed in the US, representing more than one-third of its store count. Further, 150 stores have been remodeled or downsized. In 2017, ANF intends to close roughly 60 stores in the US through natural lease expirations, and remodel 40 Hollister stores. Additionally, with about 50% of the US leases expiring by the end of FY 2018, the company has significant flexibility to strike the right store count balance, and drive efficiency by remodeling or resizing the stores, renegotiating leases, or shuttering down. In theory, the company’s comparable sales should show an improvement when the unprofitable stores are closed down. While the store closure program is an important step for the company to return to positive growth, the stores continue to play an active role in terms of customer engagement.

5. Online Partnerships

Abercrombie has partnered with online retailers such as Zalando and Zalora, to get access to their customer base in Europe and Southeast Asia, respectively. Since every sale through these websites will be additional revenue, without any fixed costs associated, it may have a positive impact on the margins. The company is also not that heavily present in these regions, and hence, a presence on the websites will not result in cannibalization. The company has also last month launched Abercrombie & Fitch and Abercrombie Kids on Alibaba’s Tmall platform. The success of Hollister on this platform for the past three years prompted ANF to showcase its other brands as well.

6. DTC Segment

One avenue of long-term growth is the company’s online business. A fundamental shift from brick-and-mortar to the online platform is evident, and retail companies have to embrace this trend in order to be relevant. Keeping this in mind, ANF has integrated its Abercrombie and Kids websites, and optimized it for mobile, payment, and tracking. The full omnichannel offering has been rolled out in the US, Canada, and the UK, with plans to roll-out internationally through the remainder of 2017. For the second quarter, the DTC segment accounted for 24% of the sales, up from 23% last year, with strong gains seen in mobile, which directed roughly two-thirds of the DTC traffic. ANF is also expending $20 million this year for the global roll-out of its omnichannel and CRM capabilities.

See our complete analysis for Abercrombie & Fitch

Have more questions about Abercrombie & Fitch? See the links below:

• Can 2017 Be A Good Year For Retail Stocks?
• Part 2: Is There A Way Out Of The Rut For Brick And Mortar Stores
• Retailing Conundrum, Part 1: Is There A Way Out Of The Rut For Brick And Mortar Stores?
• Abercrombie & Fitch’s Direct Business Is Its Only Beacon Of Hope

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