By Neil Saunders
While some of the topline numbers from Abercrombie & Fitch look soft, we remain generally impressed with the continued positive performance, even against a more challenging backdrop. Such challenges are a tough set of prior-year numbers, when total sales rose by 10.6% and comparables by 5%, as well as a much more subdued economic backdrop which saw a moderation in overall consumer demand for clothing. A&F has remained firmly on track, showing a sign that the underlying strategy is sound.
The modest gains in overall sales serve partly as a function of the ongoing store closure program. This selective pruning of the portfolio is a necessary measure which, over the medium term, will help improve profitability and allow A&F to focus its investments on stores and channels that can truly deliver. The company’s willingness to sacrifice even high-profile stores, if they do not generate profitable benefits in sales or in terms of driving online revenue, is prudent. Alongside the closure of underperforming stores, the right-sizing, reconfiguration, and investment in existing stores is also paying dividends. A&F has a firm grip on creating a chain that is suited and configured to the needs of modern consumers.
At brand level, Abercrombie has returned to positive comparable sales territory after last period’s decline. Although a few product missteps were responsible for last quarter’s weaker performance, Abercrombie has quickly pivoted away from them to clear down inventory. This is a testament to the resilience and flexibility the company has now built into its supply chain. We remain broadly impressed by the product innovation. The range is stronger than a few years ago with a better mix of classics and more fashion-forward pieces. However, if Abercrombie wants to keep customers coming back, it is critical that even staple pieces are given a fresh take via different cuts, small embellishments, or other differentiating features.
Hollister remains the star of the show with its good run of performance continuing via a 2% uplift in comparable sales. Performance is largely due to a fully integrated approach; improvements to stores, product, marketing, and loyalty schemes all help create an immersive and connected customer experience. There is a lot more runway that will allow Hollister to grow over the next few quarters, especially as product investment and innovation continues.
Across all brands, digital investment has been a core strategy for growth. Customers at Abercrombie and especially at Hollister are digitally active, particularly on mobile devices. This affords A&F an opportunity both to connect and engage online and convert traffic into sales momentum, as there is evidence that traction is growing. The strong growth in online orders picked up in stores is very welcome, especially as it helps protect margins and generates incremental sales.
The international aspect remains a latent area of opportunity for A&F. The company has pivoted away from operating expensive, high-profile flagship stores to a more regionally sensitive operation focused on everyday outlets in good malls and shopping centers. But more work is needed to regionalize offers and build a more solid international brand presence.
Overall, A&F is on the right track. Management has a sound plan and is delivering against it. In a turbulent apparel market, A&F is a stable company with good prospects.
Neil Saunders is managing director of research firm GlobalData Retail.