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Analysis: Abercrombie now has “much clearer” sense of direction

Following on from a robust Q4, Abercrombie & Fitch has continued its run of success with another solid set of sales numbers. Although growth has come off the back of soft prior year comparatives, the positive comparable sales numbers are an indication of momentum at both the Abercrombie and Hollister brands. In our view, under the leadership of Fran Horowitz and her team, the business now has a much clearer sense of direction and a strategy that is producing results.

Last quarter the Abercrombie brand delivered its first positive comparable sales number in five years, an advancement that has continued into this period with the division reporting a 3% uplift. While this represents something of a bottoming out of sales declines, we also believe that Abercrombie is benefitting from the many improvements that have been made over the past 12 months.

One of the biggest shifts at Abercrombie has been the change in tone of the business. It has moved from a brash brand to a somewhat confused brand to a brand with a much clearer and more focused identity. While we would argue that this reinvention is still a work in progress, we think that the more authentic tone and the coalescing around an effortless American casual theme has paid dividends.

A key part of the reinvention has been a focus on the product. There are two things we particularly like here. The first is the more disciplined approach to merchandising, which has involved having fewer items in the assortment but making sure that the pieces stocked are a mix of staples and on-trend garments. This has made the range much easier to shop. Alongside this, there have been significant improvements to quality and styling. Most of this is subtle and seen in small details like stitching, discrete monograms, or the design of buttons and zippers. The net effect is a range that is more mature and sophisticated, with many more ‘must have’ elements.

Although it has traditionally been a stronger business, Hollister has also benefitted from a more focused approach. Its carefree casual position resonates with the target audience and this is helping to differentiate it and drive sales in a crowded marketplace.

Across both brands, there are some impressive changes which are supporting sales growth. Marketing efforts are much more comprehensive, with social channels and influencers being used to gain attention. Importantly, the company is now marketing where its customers are rather than just through traditional channels, using platforms like Snapchat and app-based games to create brand awareness and affinity.

Stores have also been an area of focus and we applaud the continued efforts to rightsize the chain. Moreover, we remain impressed with the new store formats of both Abercrombie and Hollister. These represent an enormous shift in thinking and allow customers to see and experience the new face of the brands. Digital has not been neglected and we equally welcome changes made to the websites and the development of more omnichannel services.

Admittedly, all of this has added to costs, which contributed to this quarter’s loss. That said, the company is a lot less in the red than it was this time last year, which represents progress.

Abercrombie & Fitch’s work is not yet complete. The past couple of years were about stabilizing and transforming the business, something we think has been achieved. In the year ahead, the focus must be on accelerating growth.

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Lululemon maintains momentum in Q1 amid search for CEO

BY Marianne Wilson

Lululemon Athletica posted a strong set of results for its first quarter, driven by surging sales.

The apparel retailer maintained its momentum as it continues to search for a CEO to replace Laurent Potdevin, who left in February after allegations of unprofessional behavior. Lululemon chairman Glenn Murphy, formerly CEO of Gap Inc., is leading the company while it conducts a search for a new chief executive.

Lululemon reported net income of $75.2 million, or 55 cents a share, for the quarter ended May 5, compared with $31.3 million, or 23 cents a share, in the year-ago period. Adjusted earnings were 55 cents a share. Analyst had estimated earnings of 46 cents a share.

Revenue rose to $649.7 million, more than expected, from $520.3 million. Comparable sales jumped 19%, easily topping analysts’ estimates of 12.2% growth.

Analyst Neil Saunders, managing director of GlobalData Retail, commented that Lululemon’s “mindful approach,” which is always looking for ways to combine great design with great function, has allowed the bramd t differentiate itself from rivals — and persuade its customers to pay very full prices for its products.

“On the matter of pricing, it is also worth noting that Lululemon’s price integrity is another reason for its outperformance,” he said. “Promotional periods notwithstanding, products are not discounted, and customers know they must pay the full price if they want the product. Careful control of distribution, with items only really only available via Lululemon’s site or stores, is fundamental to this success.”

For the full year, Lululemon boosted its earnings guidance to a range of $3.10 to $3.18 a share, up from the $3 to $3.08 projected in March.

On the chain’s quarterly earnings call, Murphy said Lululemon has interviewed a number of potential CEO candidates for the post and will discuss them with the company’s full board shortly.

“I think we can now take this search to the next step,” Murphy said.

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Abercrombie turnaround holds steady in Q1

BY Marianne Wilson

Abercrombie & Fitch exceeded Wall Street forecasts and cut its loss in the first quarter amid strong demand for Hollister and an upturn in its namesake brand.

The apparel retailer reported a net loss of $41.5 million, or 62 cents per share, for the quarter ended May 5, down from a net loss of $61 million, or 91 cents per share for the the year-ago period. Excluding certain items, the company reported an adjusted net loss per share of 56 cents for the quarter. Analysts has expected a loss of 77 cents.

Net sales increased 11% to $730.9 million, ahead of Street projections. Direct-to-consumer net sales increased 14% to $200.7 million from last year, accounting for approximately 27% of total net sales. By brand, net sales increased 13% to $423.6 million for Hollister and increased 7% to $307.3 million for Abercrombie from last year.

Total same-store sales rose 5%. By brand, same-store sales 6% at Hollister and 3% at Abercrombie.

“Results exceeded our expectations driven by a 5% increase in comparable sales, gross margin expansion, and 460 basis points of expense leverage,” said CEO Fran Horowitz. “Hollister continued to drive strong sales growth across channels and geographies and Abercrombie built momentum with another quarter of positive comparable sales led by strength in North America.”’

The company plans to open 22 full-price stores in fiscal 2018, with 13 Hollister and nine Abercrombie locations. It anticipates closing up to 60 stores in the U.S. during the year through natural lease expirations.

For analysis of Abercrombie’s results, click here.

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