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Abercrombie Posts Q2 Profit, Sales Surprise—Here’s How

Tight inventory management helped Abercrombie & Fitch Co. deliver a second-quarter surprise on profits and sales, not to mention its best operating income report for the quarter in six years.

In a Nutshell: CEO Fran Horowitz said the teen-friendly retailer is “listening, learning and evolving, and staying nimble in this unprecedented period of turmoil and uncertainty. Since the start of the pandemic, our global teams have been tirelessly at work, rapidly pivoting in response to the changing environment due to COVID-19 and calls for social justice. We have made many difficult decisions with a purpose of strengthening our company for near-term success and long-term growth.”

Horowitz told investors during a conference call that about 90 percent of its global store network have reopened by the end of the quarter, although many are operating at reduced hours. And while “stores have experienced year-over-year declines in traffic, that’s been partially offset by digital” net sales, which she said rose 56 percent to $386 million. The fashion group saw robust double-digit gains each month on digital sales, with sales on its mobile app “rising approximately 50 percent in the quarter, she added.

“Our inventory is very balanced,” Horowitz said, noting that the company’s “agile” sourcing team has been able to “chase into what we need.” The leaner inventory has resulted in lower promotions and clearance, and improved” average unit retail, she said, referencing the metric used for pricing and sales comparison that gauges an item’s average cost over time.

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Abercrombie & Fitch expects to “see a much longer run” for the back-to-school season, and has adjusted its cadence in merchandise flow. For now, the company has kept items such as swim and tees longer on the sales floor. “We listen closely to our customers on a weekly basis,” Horowitz said, noting inventory is kept lean so it can chase a hot-selling product category or item.

As for back-to-school in general, the company saw a slow start in July as a resurging coronavirus re-closed some stores. “We shifted more of our focus to wear-now assortments and the customer has responded favorably to the new products,” she said. Horowitz said the back-to-school season will likely stretch as late as October.

Horowitz told Sourcing Journal about 80 percent of its roughly 100 California stores remain closed due to government restrictions, though they’re servicing customers by fulfilling online orders offering curbside delivery.

The apparel seller pulled down inventory by 1 percent in the last quarter, after evaluating Covid-19 scenarios, she added. Inventory of $453 million was down 7 percent in the second quarter, compared with year-ago figures.

The company plans to remain conservative with inventory levels going forward. “In retail, chasing is a good way to go,” Horowitz said. As for product mix, she expects denim to remain a strong category component in the third and fourth quarters, but “we’re not going to lean too heavy into anything,” she stressed.

Net Sales: For the three months ended Aug. 1, net sales fell 17 percent to $698.3 million from $841.1 million.

By brand, sales at teen concept Hollister fell 15 percent to $429,2 million, and Abercrombie sales were down 20 percent to $269.1 million.

Horowitz said women’s loungewear and denim shorts, selling predominantly at full price, were popular items in the quarter, while its men’s assortment saw lounger shorts one of the must-haves in the quarter. At Hollister’s growing intimates line Gilly Hicks, the new active line continues to resonate with shoppers. At Abercrombie, shorts, knit tops and swim were popular women’s items, while for men’s tees and shorts saw good sell-throughs.

For the six months, net sales fell 24.8 percent to $1.18 billion from $1.58 billion.

Earnings: Net income for the quarter was $5.5 million, or 9 cents a diluted share, against a net loss of $31. 1 million, or 48 cents, in the year-ago quarter. On an adjusted basis in constant currency, diluted earnings per share were 23 cents.

Wall Street was expecting an adjusted diluted loss of 83 cents on revenue of $658.4 million.

As of the end of the quarter, the retailer had cash and cash equivalents of $767 million, compared with $500 million a year ago.

The company said it expects net sales in the third quarter to be down in the range of 15 percent to 20 percent versus last year. It did not provide any other guidance, citing Covid-19 uncertainties.

For the period, operating income was $14.1 million, which Scott D. Lipesky, senior vice president and chief financial officer, told analysts is the company’s second-quarter best since 2014. And he said the e-commerce channel is “profitable on a four-wall basis,” which also came in higher than last year. Addressing back-to-school’s slow start, Lipesky said that isn’t reflective of assortment issues, given trends from digital sales, but more a reaction to the chaos surrounding the school season, with some institutions delaying “well into September.”

Lipesky said the company has about 200 store leases that are coming due by the end of the year, and is reviewing which ones it might want to exit. How that shakes out will depend on a number of factors, including rent negotiations with landlords.

For the six months, the net loss was $238.7 million, or $3.82, versus a net loss of $50.3 million, or 76 cents, a year ago.

CEO’s Take: “We are proud of our recent execution, although cognizant and humbled by the many unknowns we as individuals and as a company continue to face. Looking ahead, the physical and mental health and safety of our customers, associates and communities remains a top priority. We will continue to be vigilant, thoughtfully managing operations while leveraging our strong liquidity position to strategically invest in critical functions that support our future global growth opportunities,” Horowitz said.