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Abercrombie Says No to Raising Prices and Yes to Supply Chain Tools

While Abercrombie & Fitch Co. posted a loss for the quarter, chief executive Fran Horowitz said the brands under its umbrella are showing improvement. She noted that the company has started working with size and price optimization tools to increase speed and efficiency throughout its customer product lifecycle.

In a Nutshell: Horowitz said the company will spend the balance of the year learning from its new optimization tools and expects to “realize inventory efficiencies and margin benefits in fiscal 2020.”

She also noted that the company’s largest target customer base is Gen Z, and research shows they visit stores more often than loyal millennials. One top priority for the company in providing a seamless omni-channel experience is its global store network optimization initiative.

The plan is to right-size, remodel, open and close stores. Since 2010, more than 475 underperforming locations have been closed. The company has also provided 300 new store experiences, while reducing gross square footage by 17 percent. About 30 percent of the global store fleet at Hollister has been updated, while at Abercrombie that number is closer to 10 percent. The original Abercrombie stores had footprints between 8,000 and 10,000 square feet, while the newer stores are “doing the same amount of business with 30 percent less space,” the CEO said in a telephone interview.

In the telephone interview, the CEO said what’s resonated with shoppers has been the fitting room upgrades where the company has completed full omnichannel integration in the design of the space. As for what’s resonating now on the merchandise front, denim has remained a plus for Hollister’s back-to-school offerings across both genders. At Abercrombie, targeting the 20-something crowd, denim has also resonated well with customers, while the brand has also seen a record business in dresses and jumpsuits.

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Joining the telephone interview was Scott Lipesky, senior vice president and chief financial officer, who said the company has no plans to pass along increased costs from tariffs to its customers. During the company call to Wall Street, he said the company has been proactively reducing its dependence on China for the past several years. While last year the company’s exposure was 25 percent of total merchandise, its expects that to decline to below 20 percent this year.

The CFO noted that about one-third of company revenues are from outside the U.S. And he said that many of its vendors have also been shifting production out of China. “As we look to other countries, quality remains a top priority, and thus far we have not been disappointed,” he said. Because the tariff situation is fluid, the company will evaluate what to do about prices for spring at a later date.

Net Sales: For the three months ended Aug. 3, net sales dipped 0.2 percent to $841.1 million from $842.4 million. Total company comparable sales were flat versus last’s year 3 percent increase and flat for each of its Hollister and Abercrombie brands. By region, sales in the U.S. were up 2.3 percent to $543.5 million, while international sales decreased 4.3 percent to $297.6 million. Horowitz noted in a company call to Wall Street investors that second quarter comps benefited from “record results in jeans, pants, swim and intimates,” but were offset by softness in women’s tops. She also said reaction has been favorable to the new women’s jeans assortment, which is supported by its Curve Love Jeans campaign.

“While we’re pleased with the continued stabilization at Abercrombie, our results in Hollister were mixed, with guys achieving another record quarter, but girls falling short of our expectations,” Horowitz said, referring to the softness in women’s tops. That said, the Hollister brand did see record performance in two must-grow categories for girls, its Gilly Hicks intimates line and swim. The quarter also saw “strong acceptance” by guys of the bottoms offerings across shorts, pants and jeans.

Horowitz also told Sourcing Journal that the company’s agile supply chain allows it to course correct quickly, and that the merchandising teams dig deep into the weekly receipts to see what’s working and what isn’t.

The company said gross profit for the quarter was 59.3 percent, down 90 basis points from last year.

The quarter saw Hollister shut its SoHo location in Manhattan. An Abercrombie store in Milan will close by the end of 2019, while the one in Fukuoka, Japan, is scheduled to close in fiscal 2020.

As A&F Co. looks to grow its international presence, the company said Thursday that Daniel Le Vesconte and Olga Wu have joined the company as group vice presidents, with Le Vesconte heading up oversight for Europe and Wu having responsibility for Asia Pacific. Both will report to Kristin Scott, the global brands president.

Earnings: The net loss widened to $31.1 million, or 48 cents a diluted share, from a net loss of $3.9 million, or 6 cents, a year ago. The company said the loss reflected the negative impact from one-time charges connected to its exit from certain flagship store locations.

Wall Street was expecting a loss of 53 cents on sales of $852.5 million.

For fiscal year 2019, the company guided net sales to be flat to up 2 percent, driven by comparable sales and net new store contribution, while comparable sales were forecasted at flat to up 2 percent, against positive comp sales of 3 percent in 2018.

For the third quarter, net sales were forecasted to be up 1 percent, with comp sales flat, against a positive comp of 3 percent in the year-ago quarter.

Projections for both periods include the estimated impact of tariffs imposed on Chinese imports proposed to date. Lipesky, the CFO, said the negative impact from the list 3 and 4 tariffs is estimated at around $6 million.

CEO’s Take: Horowitz said while the second quarter started slowly, the company saw monthly improvements as the quarter progressed, which allowed it to deliver on its previously issued second-quarter outlook. “Momentum has continued quarter-to-date with a solid start to the back-to-school season in the U.S., where comps are positive across brands,” the CEO said.