By Neil Saunders
On the surface, Abercrombie & Fitch’s total sales decline of 3% looks poor. However, the dip is a function of a calendar shift and a shorter trading period compared to last year; currency fluctuations also took their toll. The comparable sales figure, which strips out these negative influences, provides a more balanced assessment of performance, and A&F continues to deliver good growth. The comparable growth rate of 3% is particularly impressive when set against last year’s stellar 9% uplift.
At brand level, there is now a clear divergence between Abercrombie and Hollister. The former posted a 2% decline in comparables with the latter recording an impressive 6% uplift.
Hollister displays impressive marketing
Hollister is a brand that is strongly connected to its core customer base, through both impressive marketing and an assortment attuned to their needs and tastes. Our own tracking shows that the brand has strong traction and is attracting and converting a core group of shoppers on a regular basis while adding new shoppers into the mix. Provided Hollister remains on trend with its range—and we see no reason why this should not be the case—it should continue to perform well as the company moves into its new fiscal year.
After a good run, Abercrombie’s performance, which saw comparable sales decline by 2%, was a little soft this time around. While the brand was up against tougher prior-year figures, there has clearly been a loss of momentum. Our data show that affinity to the brand, although much improved, is more tenuous than Hollister. This means that Abercrombie was more exposed to the loss of consumer momentum in the general economy after Thanksgiving and Black Friday.
Nevertheless, the brand continues to show good potential, and there were a number of fashion wins over the period, including good traction in outerwear. Despite the slowdown, we remain confident that Abercrombie is on the right track and can improve its numbers as it fine-tunes both marketing and merchandising.
U.S. continues to be driver of growth
On a geographical basis, the U.S. continues to be the driver of growth with a 5% uplift in comparable sales this quarter. Comparatively, the international numbers, where comparables declined by 2%, are much softer. Although international markets hold significant future potential for A&F, we remain cautious on the general outlook in some geographies, most notably Europe, where consumer sentiment is deteriorating and apparel competition remains extremely tough.
Away from the sales numbers, we are pleased with the continued progress on the bottom line. Thanks to initiatives designed to streamline the business, gross profit rates improved by 70 basis points this quarter. At net income level, despite one less week of trading, profit was up by 30.2%, largely thanks to a lower income tax expense. Looking ahead, we believe that there are further gains to be made from reducing expenses and, most importantly, that management has a firm grip on operations and will engineer savings where it is prudent to do so.
Overall, we remain satisfied with the progress of the company and its individual brands. Advancement has clearly been made, and this is showing up in customer data and the financials. There is obviously a lot more work to be done, especially in the Abercrombie division, but there are clear plans for this. As such, both brands have a clear sense of direction as they move into the new fiscal year.
Neil Saunders is managing director of research firm GlobalData Retail.