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Hollister Is Abercrombie’s Weakest Link Right Now

Abercrombie & Fitch Co. was caught off guard by the Hollister customer’s “quick shift out of bottoms and into tops” and dresses in the second-quarter, CEO Fran Horowitz said, though the company “made sure that those trending categories are in line for fourth quarter.”

In a Nutshell: Horowitz said the Columbus, Ohio-based company is taking “decisive action” to navigate choppy waters.

“We’ve recently experienced a significant divergence with sales and gross margin trends amongst our two largest brands, Abercrombie adult and Hollister,” she said, adding that consumers have been “actively shopping for their weekend trips, weddings and going back to the office.”

For the quarter, the Abercrombie brand delivered its highest second-quarter sales since 2015 and its ninth consecutive quarter of AUR (average unit retail) growth.

In a telephone interview, Horowitz said the company is “very pleased” with Abercrombie’s denim business, which “has continued to grow.” The Abercrombie brand’s older customer tends to be better off financially than Hollister’s younger cohort, for whom inflation is proving to be a real sticking point. Many return-to-office workers are dressing down to the benefit of the company’s fashion denim sales and the Abercrombie brand’s new pants business.

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“The Hollister customer in total is being pressured by inflation and having less discretionary income to spend, and they have to make decisions on where they’re spending it,” Horowitz said. “So in the short period of back-to-school so far, we’ve seen a little bit of a shift to tops, and that to me is where they’re updating their wardrobe.”

The company reacted to the Hollister hiccups by pulling many of the levers at its disposal. “We are rightsizing Hollister inventory levels for holiday and beyond through a series of actions that included reducing receipts, utilizing box-and-hold strategies on certain core items and re-cadencing the timing of inventory sets,” she told Wall Street analysts.

She went on to say that the retailer has a “very agile and flexible supply chain here, and we can react to what’s happening in the business.”

Horowitz offered a theory to explain why tops seem to be outperforming right now, beyond the inflation factor. “Bottoms have been trending quite some time,” she said on the earnings call. “The past three years, the consumer does have a lot of those newer fashion bottoms in their closet,” while “their wear occasions have shifted a bit.”

The CEO said she expects the “Hollister consumer will continue to be pressed for the balance of the year, and our expectation is that Abercrombie’s going to continue in the direction that it’s been [trending].”

Sub-brands such as YPB, the Your Personal Best activewear line, is doing well across both genders.

As for the start of the third quarter, jeans and dresses continue to do well at Abercrombie, Horowitz said. At Hollister, dresses are the top-selling category at the moment.

Looking ahead, the company is on track to open 60 stores before January, focusing on smaller format doors in new and existing markets.Los Angeles and Milan got the first two installments of its new 4,500-square-foot hotel-inspired Getaway Shop, which will inform the rest of the Abercrombie brand openings this year.

“These upcoming stores , as well as others opening this year across brands, stay true to our stringent real estate strategy—right size, right location, right economics. If we can’t check the box in all three, we will continue to walk away,” she said.

Chief financial officer Scott Lipeksy said the company, which has 250 leases up for renewal, could close 30 locations depending on how landlord negotiations go.

Hollister sales have recently seen “week-over-week improvement,” he said, adding that the company “turned on some markdowns and promotions kept the inventory current” and “churning.” Given the actions undertaken to right-size inventory, “we will chase if need to and there is capacity out there to do that,” he said.

Net Sales: Net sales for the quarter ended July 30 fell 7 percent to $805.1 million from $864.9 million.

By brand, Hollister net sales encompassing Hollister, Gilly Hicks and Social Tourist fell 15 percent to $436.9 million, while Abercrombie, including Abercrombie and Abercrombie Kids, rose 5 percent to $368.2 million. By region, sales in the U.S. slipped 4 percent to $568.1 million. EMEA (Europe, Middle East and Asia) sales fell 13 percent to $166.8 million, while sales in APAC (Asia Pacific) fell 33 percent to $27.8 million. The balance of sales were from “Other” areas not included in the U.S., EMEA and APAC regions.

Feeling the weight of inflation, the Hollister consumer is moving away from core products to fashion-driven merchandise. Abercrombie & Fitch Co.

Inventories at the end of the quarter was $708 million, with 92 percent classified as current season, long-lived or for future sets.

For the six months, net sales slipped 2 percent to $1.62 billion from $1.65 billion.

Earnings: The net loss was $16.8 million, or 33 cents a diluted share, against net income of $108.5 million, or $1.69, in the year-ago quarter.

Wall Street was expecting adjusted diluted earnings per share of 22 cents on revenue of $843.6 million.

For the third quarter, the company forecasted net sales to be down high-single-digits to the year-ago level of $905 million. It expects early third-quarter trends will continue.

For Fiscal 2022, net sales are forecasted down mid-single-digits from $3.7 billion in 2021. The prior outlook was flat to up 2 percent at the end of the first quarter.

For the six months, the net loss was $33.3 million, or 65 cents a diluted share, against net income of $150.3 million, or $2.32, in the year-ago period.

CEO’s Take: “We expect macro headwinds to persist and have taken action to adjust receipts across brands to fuel winning categories for late fall and holiday,” Horowitz said. “Looking ahead, we will continue to monitor sales volumes and react with agility to ensure inventory turns appropriately and we expect year-over-year inventory growth to have peaked in Q2 and to moderate significantly in the back half as we lap late receipts from last year.”