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‘Denim Has Legs,’ Abercrombie CEO Says

Denim’s still resonating with customers, and the new digital operating helped Abercrombie & Fitch Co. beat Wall Street’s third-quarter earnings estimates.

In a Nutshell: According to CEO Fran Horowitz, the specialty retailer achieved an 8 percent operating margin, representing “our best third quarter operating margin and income since 2012.”

The new denim cycle continues to resonate with customers. “Denim continues to be on fire,” Horowitz told analysts Tuesday morning on a conference call.

“We just reported our highest denim quarter in history across all brands and genders,” she said. “Between the wider legs [and] lighter washes, he’s adopting them [and] she’s adopting them. It’s kind of a trend and denim has legs—no pun intended—but it is going to last quite some time. If you look at what happened with skinny jeans, that trend went on for a decade and we are just at the beginning of this trend. We’ve been seeing such a positive response from the consumer, and he and she both need newness in their wardrobe that we expect to continue for quite some time.” 

In addition to denim, other top women’s categories include dresses, shorts, tops and bottoms, Horowitz said.

“Across the company we continue to lean into the power of social selling and refining strategies tailored made for each our brands and their target customers. This includes live shopping events on TikTok, on Instagram, social product launches in app storefronts across platforms, augmented reality campaigns, Snapchat and robust influencer programs—and our customer is responding. Our focus on digital is intertwined with providing the best omnichannel experience for our global customers by meeting them whatever, wherever, and however they choose to interact with us,” she said.

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Hollister reported its strongest third-quarter sales since 2013, and the best U.S. selling period since 2012. The new gender- and size-inclusive Gilly Hicks product line resonated with customers, the company said.

Horowitz said Abercrombie Kids had a great season with its first “mini-me” collection, spanning fall essentials for adults and kids. The Abercrombie brand’s influencer team doubled down on social selling.

The company has not needed to raise prices this year, “nor do we plan to for the fourth quarter,” Horowitz said.  Instead, reduced promotions drove its sixth consecutive quarter of AUR (average unit retail) growth,” she added.

“Our customers continue to adopt a ‘buy it when you see it’ attitude. This represent a major shift in mindset and was some years in the making,” Horowitz said of efforts to wean customers off the markdown merry-go-round.

Before Covid, many retailers including Abercrombie misaligned supply and demand, Horowitz said in a telephone interview. “And because we were over supplied, we always were more promotional than we wanted to be. One of the best learnings coming out of Covid was to have our inventory at a much more managed level,” she said, which will train consumers to understand there’s less product available.

“If they don’t buy it when they see it, they may not actually be able to buy it at all. This has been happening for probably the past 18 months,” Horowitz said, adding that social feedback indicates a “consumer willing to pay full price.”

Net Sales: For the three months ended Oct. 30, net sales rose 10 percent to $905.2 million from $819.7 million, and were up 5 percent when compared to 2019. Digital net sales rose 8 percent to $413 million, or 55 percent over 2019 comparisons.

Hollister’s quarterly net sales, including Gilly Hicks and Social Tourist, rose 10 percent to $522.3 million. Net sales at Abercrombie, including Abercrombie Kids, grew 12 percent to $382.8 million.

By region, net sales in the U.S. rose 17 percent to $654.9 million, while Europe, Middle East and Africa sales fell 6 percent to $179.2 million. Net sales in Asia Pacific fell 12 percent to $38.2 million. Net sales in other regions rose 18 percent to $32.9 million.

CFO Scott Lipesky Western Europe’s covid restrictions hampered international results. “We continue to view international as a long-term growth opportunity,” he said.

Inventories at the end of the quarter totaled $544 million, flat from a year ago.

For the nine months, net sales rose 27 percent to $2.55 billion from $2.00 billion.

Earnings: Net income rose 12 percent to $47.2 million, or 77 cents a diluted share, from $42.3 million, or 66 cents, in the same year-ago quarter. On an adjusted basis, diluted earnings per share (EPS) were 86 cents.

Wall Street expected adjusted diluted EPS of 66 cents on revenue of $896.9 million.

The gross profit rate was 63.7 percent, down 30 basis points from last year, driven by 300 basis points of higher average unit cost from freight inflation and efforts to offset supply chain issues. The additional costs were almost fully offset by higher average unit retail on lower promotions.

Lipesky said the company expects a $75 million headwind in the fourth quarter, which would pressure gross margins because of higher delivery costs to move product into its busiest quarter. He said the costs are expected to be offset by lower markdowns and promotions, as well as AUR growth.

Looking ahead to the full-year outlook, Lipesky said the company expects an operating margin rate in the 9 percent to 10 percent range, essentially tripling the 3 percent rate in 2017.

For the nine months, net income was $197.5 million, or $3.10 a diluted share, against a net loss of $196.4 million, or $3.14, in the same year-ago period.

CEO’s Take: “The start of the holiday season has been promising. Customers have come out early to shop and have been responding well to assortments,” Horowitz said.