Abercrombie & Fitch’s brand reinvention in recent years has focused on moving away from its image-conscious marketing, but as the specialty retailer navigated the Covid-19 pandemic, its latest positive changes have been purely operational.
“The biggest thing we’ve talked about is running the business with less square footage and less inventory, and those are two big chunks of expense,” Scott Lipesky, chief financial officer at Abercrombie & Fitch, said during the Jefferies Virtual Consumer Conference. “Moving inventory around right now is very expensive, and the less you’re moving around—using that mantra of doing more with less—is a good thing for the bottom line.”
Increasing costs for both labor in stores and distribution centers as well as shipping and fulfillment have been a headwind to operating a retail business, but Lipesky feels Abercrombie has been able to absorb some of the inflationary pressures large due in part to its store optimization initiatives, which cut $115 million—or 20 percent—in occupancy costs last year. A&F’s has been moving away from traditional flagship locations, and instead focusing on smaller format locations.
A&F plans on reinvesting those occupancy savings in fulfillment as it reconsiders its store fleet going forward. In total, the retailer has approximately 250 leases expiring at the end of 2021, representing nearly one-third of its store fleet.
“We’ll walk into those negotiations like we always do,” Lipesky said. “For big stores, we want to make them smaller, and for the stores we’re in, we want to move to variable rent, and try to find a deal that works for both us and the landlord. We believe we have continued occupancy opportunities long term.”
Though the company had a bit of a pause on store remodeling plans during Covid-19, it’s now waiting to see how mall traffic plays out as shoppers return to normalcy.
Although the number of stores the retailer will operate beyond 2021 is uncertain—it had 731 stores open worldwide as of May 1—expansion into Europe is a top priority.
CEO Fran Horowitz said during the session that the retailer is closely eyeing opportunities across the continent, establishing a London team 18 months ago to “get closer to the customer.” Despite nearly 60 percent of its European store base closed for the majority of the quarter due to Covid-19 restrictions and lockdowns, Horowitz remains confident in the market’s future potential.
“We’ve been able to recruit some terrific talent, and we’re excited about the product acceptance and how they are getting close to the consumer between the marketing and the product,” Horowitz said. “We’re making a lot of progress, and once the business normalizes, hopefully the next door is open and we’ll continue to see that acceptance. We’ve leaned into digital and we’ve seen a nice business across those countries.”
Lipesky co-signed Horowitz’ confidence levels based on 2019 business, which reached $1.2 billion outside of the U.S. that year despite what he referred to as “a relatively low level of marketing” and small teams in the E.U.
Asia is another market Abercrombie & Fitch management is looking to crack, with the retailer opening a Shanghai office alongside London in late 2019. But Horowitz admitted that the company is “behind” in the region as progress has lagged that of Western Europe. Asia is still Abercrombie’s smallest region with the lowest brand awareness.
Horowitz said the retailer has seen a “nice shift in proportion” in denim, one of the merchandise trends execs addressed.
“For anybody who thinks that the skinny jean is dead, I’m here to tell you I don’t believe so. I think the skinny is just part of her wardrobe depending upon what kind of tops she feels like wearing or what shoes she’s wearing that day,” Horowitz said. “It’s exciting that they actually now have a new silhouette to buy, which is much looser-fitting, higher-rise, wider-leg and they have different names: mom, dad, boyfriend, cousin, brother. And she’s needing a reason to buy something new—both the Hollister consumer as well as the millennial consumer.”
Going forward, Lipesky alluded to various investments A&F plans on making for the remainder of the year, including building out its data and analytics practice and furthering the Gilly Hicks intimates apparel brand and recently launched Social Tourist, which was co-created with TikTok stars Charli and Dixie D’Amelio and marks the first new brand Abercrombie had launched since 2008, according to Horowitz.
“We reached out to [the D’Amelio sisters] and started to partner with them in back-to-school 2020, and everything that we did with them was a success, whether it was posts, whether it was product, whatever it may be,” Horowitz said. “So we got together and we said, ‘Why don’t we do something together that’s a little bit more long term?’ The girls had a dream about doing an apparel line, and we certainly were in a great position. The combination of us knowing this teen consumer so well and them having another broader audience for us to reach out to—it was the right time for both of us.’”