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Abercrombie Customers Are Discovering Pants

Young shoppers are just discovering the “pant” category, according to Abercrombie & Fitch Co. (A&F) CEO Fran Horowitz.

In a Nutshell: A&F had “inventory on-hand to meet demand during the peak holiday period,” she told investors on a call on Wednesday. “We purposely built inventory in the second and third quarters with the target to be around flat to last year by year-end.” The company ended the year with inventory of $506 million, a 4 percent improvement over 2021.

The women’s business for the Abercrombie brand achieved its “highest quarterly sales in brand history,” Horowitz said, noting sequential growth in the men’s.

Hollister still has some work to do, but “we’re beginning to see trend improvement on product and organizational actions taken in late summer, something we will carry-forward into 2023,” she said.

Horowitz said the specialty retailer focused on controlling what it could, given the Ukraine conflict, rising inflation and lingering Covid impacts.

Abercrombie women’s bottoms had their highest full-year sales ever. The Best Dressed Guest franchise helped the brand outperform in women’s dresses, while the year-old YPB, or Your Personal Best, franchise lis getting an “amazing customer response.”

In a telephone interview, Horowitz said pants have become “most exciting” of the fashion categories.

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“For Abercrombie women, bottoms was very strong. But there’s an emerging category called pants, which is kind of funny. This is new to this consumer. They’ve never worn them before. And now they’re going back to the office and they’re going out socially,” she said. Customers have been snapping up A&F’s Sloane Tailored Pant, an ultra high-rise, wide leg pant with figure-flattering pleating details and a partially elasticized waistband that’s available in several fabric and color options.

The growth of pants doesn’t mean women aren’t buying denim, but now they’re shifting from the destroyed look that’s been popular for a decade and counting. “There’s still some exciting things happening in denim. A couple of years ago when she diversified [from] skinny…into wider leg and higher rises, all of that is still happening. She’s really actually looking more now for cleaned-up, cleaner denim,” Horowitz said.

At Hollister, mid-rise and high-rise is also resonating with customers, but they’re still buying low-rise too, and cargo and utility options are favorites with teens.

Horowitz told investors that Hollister leaned into more cargoes and dresses during the summer when customer appetites quickly shifted.

Looks from Hollister for Spring 2023.

Gilly Hicks, the tween intimates and sleepwear complement to Hollister, has fully evolved into an active lifestyle assortment that includes activewear, lounge and intimates. The brand became gender-inclusive in 2021 and started opening freestanding Gilly Hicks stores last year.

Dana Telsey, chief investment officer at Telsey Advisory Group, has an “outperform” rating on shares of A&F, noting that the company “delivered a solid fourth quarter operationally with better-than-expected sales growth and operating expense control.” She nelieves Hollister should see improvements as Fiscal Year 2023 progresses.

Jefferies retail analyst Corey Tarlowe, who has a “buy” rating on A&F shares, said there will be further upside to A&F shares as Hollister improves.

Net Sales: For the fourth quarter ended Jan. 28, net sales rose 3 percent to $1.2 billion from $1.16 billion.

By brand, Abercrombie sales grew 14 percent to $560.4 million, while Hollister fell 4 percent to $639.4 million. By region, U.S. sales rose 9 percent to $920.5 million. International sales fell 13 percent to $279.3 million. The APAC (Asia Pacific) business fell 21 percent, while EMEA (Europe, Middle East and Africa) sales were down 14 percent. Other, representing sales in countries not a part of APAC, EMEA or the U.S., inched up 1 percent to $47.6 million.

For the full year, net sales were essentially flat at $3.7 billion from $3.71 billion.

Earnings: Net income fell 41 percent to $38.3 million, or 75 cents a diluted share, from net income of $65.5 million, or $1.12, in the year-ago quarter. On an adjusted bassi, diluted earnings per share was 81 cents.

For the first quarter, the company expects net sales to be flat to fiscal first quarter 2022 level of $813 million. For fiscal 2023, net sales were forecasted to grow 1 percent to 3 percent from $3.7 billion in 2022. The company expects its Abercrombie business to continue to outperform Hollister and that the U.S. operations will continue to outperform international. In addition, growth is expected to be weighted to the second half due to the inclusion of a 53rd week to the retail calendar plus net store expansion. The additional week is expected to add $45 million to total net sales in 2023.

For the year, net income was $2.82 million, or 5 cents a diluted share, from $263.0 million, or $4.20, in the prior year.

CEO’s Take: “Each of our brands entered 2023 in a position to chase inventory, and we will continue demonstrating agility in managing the cost side of the business while balancing the long-term investments that enable growth,” Horowitz told analysts.