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Abercrombie CEO Dissects ‘Fundamental Shift’ in Store Strategy

While the rearview mirror shows inventory receipt delays and the Omicron surge hurting Abercrombie & Fitch Co.’s fourth quarter results, the company’s focused on 2022 as it begins a new chapter as a net-store opener for the first time since 2008.

In a Nutshell: Investors weren’t happy with fourth quarter results that missed Wall Street’s profit and sales estimates, sending shares of Abercrombie down 15.7 percent to $30.24 shortly after the start of trading on Wednesday.

“Following inventory receipt delays that impacted the peak holiday selling period, sales trends initially improved as product began to arrive. While mid-January was impacted by the Omicron surge, sales rebounded in late January as cases fell and new assortments [arrived]. Momentum has continued quarter-to-date, with an acceleration in the sales trend from total fourth quarter levels,” CEO Fran Horowitz said, noting a strong response to early spring assortments.

The parent to Abercrombie & Fitch, Abercrombie Kids, Hollister, Gilly Hicks and Social Tourist has been optimizing its store network by closing stores, particularly larger overseas flagships. The company has repositioned each brand to meet consumer behavior and evolved the store experience with omnichannel services including curbside pickup, ship from store, and same-day delivery.

Horowitz said on a conference call to investors that 40 percent of Abercrombie stores are updated with the new format.

“Simply put, there has been a fundamental shift in how we think about the purpose of the store,” she said, citing the new 2,200-square-foot Abercrombie Southport Chicago store that only sells women’s products.

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“For the first time since 2008, we expect to see net store openings with a minimum of 50 new omnichannel experiences offset by an estimated 30 closures,” Gilly Hicks will open one store apiece in the U.K. and Germany. 

The company also refined its design calendar, rebalance its vendor mix and expanded the countries of origin. “This has enabled us to move quicker and further improve the quality of our product. Looking ahead, we will continue to evolve our sourcing and transportation strategies to mitigate inventory [disruption,] further diversifying production [and] adding ports and carriers,” Horowitz said.

Denim remains a top category for both Abercrombie and Hollister, with “newness and fashion” driving interest, Horowitz said, adding that the company has a growing opportunity in dresses.

For those of you who haven’t heard, 2022 is predicted to be a record year for weddings. With our Best Dressed Guest Collection, we [are providing] outfitting options for weddings, shower, bachelor and bachelorette party needs,” she said.

In a telephone interview, Horowitz said Hollister won’t have a Best Dressed Guest-style franchise, but dresses will have special marketing plans targeting graduation and prom. She also said Abercrombie’s Your Personal Best activewear soft launch has resonated well in both men’s and women’s.

Chief financial officer Scott Lipesky expects shipping and freight headwinds to continue this year.

“Everyone’s optimistic that maybe we’ve seen a peak, or approaching a peak, but I’d say no one really knows at this point,” he said during the phone interview.

Lipesky expects lower air freight usage this year, attributing last year’s uptick to “trying to dig out” from production shutdowns in Vietnam. As for other freight and transportation issues, Lipesky said: “Our team is looking at every delivery from every port of origin out, [whether from] Southeast Asia or Central America and trying to figure out real time the best way to get [the goods] here. So it’s a very fluid situation.”

Net Sales: For the three months ended Jan. 29, net sales rose 4 percent to $1.16 billion from $1.12 billion in the year-ago quarter. Digital net sales of $556 million represented 48 percent of total sales for the period.

By brand, Hollister sales gained 2 percent to $668.8 million, while Abercrombie sales rose 6 percent to $492.6 million. By region, sales in the U.S. for the quarter rose 7 percent to $841.7 million. Sales in Europe, Middle East and Africa (EMEA) fell 4 percent to $226.1 million and in Asia Pacific (APAC) were down 21 percent to $46.2 million, mostly due to store closures from Covid.

Net sales for the year rose 19 percent to $3.71 billion from $3.13 billion in 2020.

Earnings: Net income fell 20 percent to $65.5 million, or $1.12 a diluted share, from $82.4 million, or $1.27, a year ago. On an adjusted basis, diluted earnings per share (EPS) was $1.14.

Wall Street expected adjusted diluted EPS of $1.27 on revenue of $1.18 billion.

For the first quarter of Fiscal 2022, Abercrombie projects net sales to rise in the low-single-digits, or slightly better than the fiscal first quarter 2021 level of $781 million.

For full year Fiscal 2022, the company guided net sales to be up 2 percent to 4 percent from $3.17 billion in 2021, with the U.S. outperforming EMEA and APAC.

Net income for the year was $263.0 million, or $4.20 a diluted share, against a net loss of $114.0 million, or $1.82, in 2020.

CEO’s Take: “Looking ahead, we will continue to thoughtfully manage the business to support long-term growth leveraging our multi-year investments in systems, processes and tools across digital, technology and data and analytics,” Horowitz said.