Abercrombie & Fitch sees a “long runway” for today’s new denim trends and worked through weeks-long Covid-fueled factory delays to report a strong second quarter.
In a Nutshell: “What an exciting time for denim. You know, this doesn’t happen very often where the industry sees such an incredible trend happening,” Fran Horowitz, CEO of Abercrombie & Fitch, which owns the Hollister, Gilly Hicks, Abercrombie and namesake brands, told Wall Street analysts Thursday in a Q2 earnings call.
While skinny jeans have been around for decades, Horowitz said new fits and styles are catching consumers’ attention. “We see a long, long runway and there [are] so many things happening between the legs opening, the high rise, the low rise because of the ‘90s influence. I mean, I could just go on and on and on, but all the exciting things are happening and what’s great is that they’re happening across brands [and] across gender,” she said, adding that “we expect to see this newness continuing well into the future.”
Shoppers didn’t wait for a sale in order to get what they wanted in the second quarter, with denim promotions during the period “well below 2020 and 2019 levels,” the executive noted.
And while women are showing interest in the new trends, men are giving fresh styles a closer look, too. High-rise and wider-leg jeans are garnering interest from male consumers, which representing “another significant opportunity,” Horowitz said.
But it isn’t just the new denim bottoms that fueled Q2 sales. With updated jeans, shoppers of both genders are looking for new tops to complement the new proportions, Horowitz said. Dresses, skirts, shorts and swim also performed well in the quarter.
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“We entered Q2 well positioned to realize the ongoing benefits from the work that we’ve done cutting into and during the pandemic,” she said, including growing the digital channels, right-sizing the store fleet and “adding to our vendor and regional carrier network.”
“We reduced the depth and breadth of promotions compared to last quarter and last year. We have not and will not step away from inventory discipline. It’s one of the key learnings we will continue to apply going forward,” she said. “Our proven playbook worked, and we achieved our best second quarter operating income and operating margin.”
The company also closed 137 stores as it focuses on digital, moves to smaller formats and optimizes its global brick-and-mortar network in line with customer behaviors.
During the quarter the company relaunched Gilly Hicks with gender- and size-inclusive products. The brand’s first standalone store opened in Columbus, Ohio. The company also launched Social Tourist in May, targeting Gen Z consumers in partnership with TikTok stars Charli and Dixie D’Amelio.
Looking at the fall season and current third quarter, Horowitz said the company remains “cautiously optimistic,” given ongoing global uncertainties. “We’ve been pleased with the US back to school season state, and believe our customers are highly engaged, actively looking to refresh their wardrobe,” she said. “We’ll continue to execute our proven playbook and focus on controlling what we can control and remain on offense.”
During a telephone interview, Horowitz said the company hasn’t raised any ticket prices, despite additional Covid costs and supply-chain disruptions.
Chief financial officer Scott Lipesky said during the call that the company experienced delivery delays, which increased over the quarter as global shipping congestion continued. “And there were renewed Covid restrictions across several of our production countries. We are managing through delays of one-to-three weeks, on average,” he said.
Abercrombie & Fitch is “working through an extended closure of factories in southern Vietnam, which have been further delayed, and are now expected to open the first week of September at the earliest,” he said. “We have and will continue to leverage our strong vendor partnerships.”
In the telephone interview, Lipesky said Vietnam will provide some “good learning” on what happens next. “Rolling closures” at other factories over the past nearly 18 months forced the company to air ship some goods to meet deadlines. “We’re working closely with our vendor partners,” he said.
Net Sales: For the three months ended July 31, net sales rose 24 percent to $864.9 million from $698.3 million. Sales were up 3 percent when compared to the same 2019 pre-Covid quarter.
The company said digital net sales decreased 3 percent to $376 million, but rose 52 percent when compared with the same 2019 pre-Covid quarter. Digital sales represented 44 percent of total second quarter sales.
By brand, Hollister sales rose 20 percent to $514.5 million, which include the Gilly Hicks and Social Tourist brands. Sales at Abercrombie were up 30 percent to $350.4 million, which includes Abercrombie & Fitch and Abercrombie kids.
By region, sales in the U.S. rose 31 percent to $601.8 million. In the Europe, Middle East and Africa (EMEA) region, sales were up 11 percent to $190.8 million. Sales in Asia Pacific (APAC) slipped 1 percent to $41.2 million, while sales in other areas were up 17 percent to $31.0 million. Total international sales—EMEA, APAC and other–rose 10 percent to $263.1 million.
Horowitz said the gross profit rate expanded by 450 basis points from last year and up 590 basis points from the second quarter of 2019. She attributed that to “double-digit” average unit retail improvement. “Combined with ongoing expense management, we expanded our operating margin by 1130 basis points year-over-year and 1800 basis points on a two-year basis,” she said.
Inventories were down 8 percent to $416 million from year-ago levels.
For the six months, net sales increased 39 percent to $1.65 billion from $1.18 billion.
Earnings: Net income skyrocketed to $108.5 million, or $1.69 a diluted share, from $5.5 million, or 9 cents, in the year-ago quarter. On an adjusted basis, diluted earnings per share (EPS) was $1.70.
Wall Street expected adjusted diluted EPS of 72 cents on revenue of $869.3 million.
For the third quarter, the company is forecasting sales up 4 percent from 2019 level in the range of $863 million. Lipesky said the U.S. is expected to continue to outperform.
For the six months, net income was $150.3 million, or $2.32 a diluted share, against a net loss of $238.7 million, or $3.82, in the year-ago period.
CEO’s Take: “Looking ahead, we will remain on offense and are confident that the proactive steps we have taken to evolve our operating model and cost structure, combined with evolved brand positioning, should continue to yield near and long-term benefits,” Horowitz said.