Abercrombie & Fitch Co. Inc. reported a good fourth quarter, although its Hollister Co. brand suffered merchandise issues for the second quarter in a row, and like other retailers, the coronavirus outbreak remains a chief concern.
In a Nutshell: “We finished the year on a strong note, with record Black Friday week results contributing to net sales growth and positive comparable sales for the fourth quarter, and for the third consecutive year. Consistent with recent trends, Abercrombie outperformed Hollister and the U.S. outperformed international, which–although still lagging–registered significant sequential improvement,” CEO Fran Horowitz said.
While the youth fashion company was able to execute in a very complicated environment, the team “got away a little bit from fundamentals” at the Hollister business, Horowitz told Sourcing Journal. “We continue to love the brand positioning,” she said, noting a renewed focus on boosting the top 30 items as well as some product opportunities for the next quarter.
Abercrombie was particularly strong in the fourth quarter in both denim and outerwear. Horowitz believes denim should continue to do well as the assortments have been resonating for both men and women, and Abercrombie’s dress category has been strong, too. Looking ahead, Horowitz said bottoms will continue to be a favored category, and she’s seeing new interest in skirts.
Horowitz addressed the impact of COVID-19 on the supply chain, noting that Abercrombie’s factories partners have restarted operations but remain below 100 percent capacity.” The coincidence in timing with the Chinese New Year meant that the company was “able to get out goods out of the region” before the outbreak, she added. Because the Abercrombie has been diversifying its supply chain even before President Trump’s tariff war, Horowitz isn’t expecting any significant issues.
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As vendors struggle to get the necessary components and inputs to produce orders, the fashion company expects “some delays of two to three weeks, on average,” Scott Lipesky, Abercrombie’s chief financial officer, said.
Net Sales: For the three months ended Feb. 1, sales rose 2.5 percent to $1.18 billion from $1.16 billion. The company posted a comparable sales gain of 1 percent on top of a 3 percent increase last year.
By brand, Abercrombie’s sales rose 7 percent to $474.0 million, with a comparable sales gain of 8 percent. Hollister saw sales slip 0.3 percent to $710.5 million, as comps fell by 2 percent.
Earnings: Net income slipped 14.2 percent to $83.1 million, or $1.29 a diluted share, from $96.9 million, or $1.42, in the year ago quarter. On an adjusted basis, diluted earnings per share were $1.31 versus $1.27 a year ago.
Abercrombie bested Wall Street’s consensus estimate of adjusted diluted EPS of $1.23 on revenue of $1.17 billion.
Because of the coronavirus outbreak in China, Abercrombie had to temporarily close its Shanghai regional home office, and stores in Mainland China and in and around Milan, due to global travel restrictions.
The APAC region contributed to less than 10 percent of fiscal 2019 sales. AEO’s supply chain has reduced its China exposure from 36 percent in fiscal 2018 to 22 percent in the past fiscal year. Of the 22 percent in 2019 based on global sales, 15 percent of that merchandise was sent to the U.S. The plan is for sourcing from China to drop to the low-teens in 2020, with just 10 percent for goods shipped to the U.S. Abercrombie’s guidance also includes the impact of tariffs on Chinese imports, it said. Most of the impact is projected to occur in the first half, which has been included in guidance for 2020 outlook and the first quarter.
“The company has seen, and expects to continue to see, a direct impact to sales and margin from lost sales in the APAC region and in locations across Europe and North America. The company also anticipates impacts from potential disruption of product deliveries across the global supply chain,” Abercrombie said.
For fiscal 2020, net sales are expected to be flat to up 2 percent, reflecting an estimated adverse virus impact in the range of $60 million to $80 million, with comparable sales down low-single digits.
For the first quarter, net sales were guided to down mid-single digits, with the adverse impact from the virus estimated at between $40 million to $50 million, and comparable sales down mid-single digits.
CEO’s Take: “Recent results reflect the significant progress we have made against our long-term initiatives, with 2019 marking the second full year of our growing while transforming phase…. We have laid the groundwork, and remain confident in our long-term vision and the global opportunities available to us as we continue to evolve with our customer,” Horowitz said.
Horowitz cited progress on delivering 157 new store experiences over a two-year period, reducing gross square footage by 6 percent and accelerating the rationalization of its flagship fleet and introducing local customer and product-facing teams in the EMEA and APAC regions.