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Abercrombie Customers Don’t Seem to Mind Paying Higher Prices

Abercrombie & Fitch Co.’s first-quarter sales beat Wall Street’s consensus estimate, despite higher-than-expected freight and raw material costs.

In a Nutshell:  The company’s “freight costs were approximately $80 million above last year, and roughly $15 million above our estimate,” chief financial officer Scott Lipesky told analysts on a conference call this week.

The company benefited from “multiple adjustments” to get shipments in on time, including diversifying carriers and port of entry to tweaking product calendars and further pursuing alternate countries of origin. The Hollister owner is bringing goods in earlier for back-to-school and holiday. “I expect inventory levels to be up in Q2 and Q3 and then start to right size more towards Q4,” Lipesky said.

It’s also negotiating shipping contracts and trying to “lock in more than we have in the past in our contracts to try to avoid some of the fluctuations that we’ve seen in the spot market,” he added. New carriers should offer additional flexibility that could bring rates down, he said. The company expects lower air freight expenses in the fourth quarter, though costs for commodities like cotton remain a challenge, Lipesky said.

Abercrombie & Fitch is on track to be a “net store opener” this year for the first time in more than a decade, with approximately 60 new stores launching instead of the 50 originally planned, Lipesky said.

“While we have heard that the consumer is spending more on experiences, our millennial Abercrombie customer is coming to us to refresh their wardrobe,” CEO Fran Horowitz said. In women’s, denim, dresses and knit delivered their highest first quarter sales and average unit retail (AUR) in over a decade. In men’s, tops were the largest revenue driver, with strong growth in graphics, sweaters and woven, she said.

Abercrombie “sold out over 25 percent of our [SKUs] within weeks” of launching the YPB (Your Personal Best) performance active line in March and has “been quickly working to replenish,” Horowitz said.

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“YPB has received high praise from customers, influencers, affiliates, and media for its fit, fashion and function,” she said, adding, “The speed with which customers have embraced YPB gives us even more confidence in its future.”

Hollister’s second-best sales result since 2012 still lags pre-pandemic numbers and tough year-ago comparisons.

“We continue to emphasize our top 30 items and must-win categories [and] we experienced strength in women’s dresses and men’s woven,” Horowitz said, while denim performed well.

The company opened its first standalone Gilly Hicks store overseas in Central Oberhausen, Germany and plans to introduce more throughout the year, including Carnaby Street in London this summer, she said.

Social Tourist offers valuable insights and up-and-coming fashion trends and shopping habits that will inform the company’s brands.

“We are keeping a close eye on each of our respective consumers and how they’re being impacted and responding,” Horowitz said. “We’ll stay close to our customer and have the ability to quickly recalibrate, reflecting their unique life activities and pressure points.”

The company finished eight quarters of consecutive AUR growth, on top of last year’s double-digit growth, showing that the customer is “responding to our price, our product our voice,” she said.

Net Sales: For the quarter ended April 30, net sales rose 4 percent to $812.8 million from $781.4 million, representing the highest first quarter level since 2014.

By brand, Abercrombie sales were up 13 percent to $383.9 million, while Hollister—including Hollister, Gilly Hicks and Social Tourist—was down 3 percent to $428.8 million. By region, U.S. volume was up 6 percent to $585. 1 million, followed by EMEA (Europe, Middle East and Africa) at up 3 percent to $164 million. Asia Pacific saw sales down 35 percent to $29.9 million. Other, for sales not in the three core regions, saw sales rise 50 percent to $33.8 million.

Inventories rose 45 percent to $563 million from year ago levels due to increased in-transit inventory, higher units on hand and increased average unit costs driven by freight compared to May 1, 2021, the company said. Gross profit rate of 55.3 percent was down by 810 basis, driven by $80 million of higher freight costs.

Earnings: The company’s net loss reached $16.5 million, or 32 cents a diluted share, against net income of $41.8 million in the year-ago quarter.

Wall Street expected diluted earnings per share of 8 cents on revenue of $799.3 million.

For the second quarter, the company expects net sales to be down low-single-digits to the year-ago level of $865 million.

For Fiscal 2022, the company now expects net sales to be flat to up 2 percent from $3.7 billion in 2021, down from prior guidance of up 2 to 4 percent.

CEO’s Take: “We will continue to manage expenses tightly and are committed to finding opportunities to offset these costs while protecting strategic investments in marketing, technology and our customer experience, which should drive sustained, long-term sales growth,” Horowitz said.