FINANCE

Analysis: Abercrombie recovery program remains on track

On the surface, this looks to be a rather disappointing set of results from Abercrombie & Fitch. Sales growth has slowed down both overall and on a comparable basis, and total sales at the Abercrombie brand have slipped into negative territory. However, there are a few mitigating reasons behind the softer performance. Foremost among them is the fact that Abercrombie & Fitch is now lapping some tougher prior year comparatives, which represented the start of its recovery period. A calendar shift and currency fluctuations also took their toll.

Despite these negative headwinds, the company has still delivered positive comparables both overall and for each of the Hollister and Abercrombie brands. And at 6%, U.S. comparables are still on fairly solid ground. On the bottom line, the numbers look good with net income up by 133% over the prior year, supported by a 75% increase in operating profit. When taken in concert, we believe these results are reasonable and show that the company’s recovery program remains on track.

Our confidence in management’s plans is supported by our consumer tracking data which continues to show a number of positive movements in consumer sentiment about both of the main brands. Over the past year, there has been a 4 percentage point increase in the number of American shoppers who say they consider Abercrombie when shopping for apparel. For Hollister, the same metric rose by just shy of 6 percentage points. The same research also reveals that among core shoppers, perceptions of quality and design at both Abercrombie and Hollister are up sharply on last year.

The results justify the step changes that have been made to things like fabrication, detailing and styling of the product set. In our view, the range – especially at Abercrombie – is now more sophisticated, is more on-trend, and better reflects what modern consumers want. There is also a cohesiveness to the assortment which stimulates multiple purchases and helps to push up average transaction values. As good as these things are, we still believe that both brands have more to do in making consumers aware of the changes and getting them to take a fresh look at the brands.

Notably, many of the positive movements are far more pronounced in the U.S. than they are elsewhere. In our view, the geographical difference in the pace of recovery is telling. While it is right that the company has focused its recovery efforts on its most important market, we believe there is now a need to adapt some of the strategies and plays so that they are relevant to overseas.

Customer dynamics, competitive sets, and perception of the brands are all very different in markets like the U.K. and a degree of localization is needed to ensure that the brands fully resonate with regional consumers. We believe that management recognizes this and has already taken some steps, such as opening a new-format mall-based store in the U.K. at Manchester’s Intu Trafford Centre.

Overall, the recovery at Abercrombie & Fitch is still a work in progress. However, turning around a once very troubled brand is far from easy. Progress and advancement do not all come at once; this is a step-by-step process that will build over time. We are satisfied that management is on the right road to recovery.

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Abercrombie exec shakeup despite strong Q3; closing fewer stores than expected

BY Marianne Wilson

Abercrombie & Fitch is changing up its executive ranks on the heels of better-than-expected third quarter earnings and revenue fueled by continued strength at its Hollister division.

The apparel retailer announced that Kristin Scott, currently brand president of Hollister Co., has been appointed to the newly created role of president, global brands, effective immediately. She will be responsible for driving the growth of all Abercrombie brands globally.

Additionally, the company said it has eliminated the individual brand president positions and that Stacia Andersen, brand president of Abercrombie & Fitch and abercrombie kids, will be leaving the company. As part of the organizational change, the company will combine the leadership of planning and inventory management into a cross-brand role, overseeing Abercrombie & Fitch adult and Hollister brands, reporting to Scott.

“With strong foundations in place across brands, our playbooks working, and a solid start to the holiday season, these organizational changes are part of the continuing transformation of our business to support our longer-term global growth ambitions,” said CEO Fran Horowitz.

Abercrombie’s net income jumped to $23.9 million, or 35 cents a share, in the quarter ended Nov.3, up from $10.0 million, or 15 cents a share, in the year-end period. Adjusted per-share earnings came to 33 cents, easily besting Street estimates of 20 cents.

Net sales inched up 0.2% to $861 million, ahead of the $854 million analysts had expected consensus. The increase came despite adverse impacts from the calendar shift and foreign currency, the company noted.

Total same-store sale rose 3%, also more than expected. It was Abercrombie’s fifth consecutive quarter of positive comp sales. Same-store sales at Hollister rose 4%, and 1% at Abercrombie. Same-store sales increased 6% in the U.S., but fell 3% internationally. Digital sales were up 16%, and were approximately 28% of total net sales for the quarter, compared to approximately 24% last year.

Horowitz said the company had a “solid start” to the holiday season, and was well-positioned “to deliver top-line growth, gross profit rate expansion and operating expense leverage for the full year.”

Abercrombie had been planning to close 60 stores by the end of this year, the majority in the U.S. But it said it now expects to close 40 stores by year-end, “based on improved performance and successful lease renegotiations.”

Neil Saunders, managing director, GlobalData Retail, commented that Abercrombie’s results show the company’s recovery program remains on track and justify the changes that have been made to such things as fabrication, detailing and styling of the product set.

“In our view, the range – especially at Abercrombie – is now more sophisticated, is more on-trend, and better reflects what modern consumers want,” he said. “There is also a cohesiveness to the assortment which stimulates multiple purchases and helps to push up average transaction values. As good as these things are, we still believe that both brands have more to do in making consumers aware of the changes and getting them to take a fresh look at the brands.” For more analysis, click here.

The retailer is expecting fourth-quarter sales to be down in the mid single digits, below analysts’ estimates for gain of about 9%. It is expecting same-store sale in the low single digits. For the full year, it is expecting sales to rise 2% to 4% and same-store sales to rise by the same amount.

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DollarTree
FINANCE

Analysis: Family Dollar still a relatively weak format in a strong market

Although this is a reasonable set of results from Dollar Tree, they reveal two truths about the company. The first is the inherent challenge of running a low-margin, high-volume business in an environment where costs are rising. The second is the struggle to improve performance at the Family Dollar banner, which is still a relatively weak format in a strong market.

Looking at the first problem, Dollar Tree’s bottom line numbers are showing clear signs of erosion from cost inflation across many parts of its business. At operating level, income tumbled by 8.8% over the prior year. This was largely thanks to higher wages, a rise in freight and shipping costs, plus some exceptional fees related to hurricane damage. Although some of this has been mitigated by higher volume we remain concerned about future profitability as other negative headwinds, especially increasing tariffs, start to bite.

In our view, while Dollar Tree can and will take action such as changing suppliers, shifting pack sizes, and negotiating harder with suppliers, it is likely to be a net loser from any hike in tariffs. It is also, because of the single price-point nature of Dollar Tree stores, less able to cope than rival Dollar General. As is evident this quarter, there is some firepower in offsetting a decline in operating profit with lower income taxes and interest expenses, however, the runway for this is relatively short.

While Dollar Tree has limited control over external costs, it is fully responsible for the destiny of the Family Dollar format – which remains the weaker part of the business. From our data, a high proportion of Family Dollar’s shopper base goes there out of necessity rather than because they particularly want to. There is nothing wrong with this position, but it does mean that as financial conditions improve, or people feel they can afford something better, they are more likely to migrate away – especially in non-consumable categories. This trend has been evident across this fiscal year and shows few signs of slowing down. We also think that the format is vulnerable to the expansion of players like Aldi, which provides low-prices with a much more compelling and enticing range of products and a better in-store experience.

The challenge for the Dollar Tree group is to transform the Family Dollar experience so that it is more compelling and stimulates greater levels of loyalty. As much as we applaud the company’s efforts to date, including the store reformats and the introduction of new private labels, we believe that there is a lot more work to do on fixing up this side of the business. The whole customer experience needs to be elevated so that Family Dollar becomes a destination of choice rather than a retailer people visit by default. Inventory discipline is also needed to reduce the number of out-of-stocks which has been an issue in some stores and is an annoyance to customers relying on the chain for essential purchases.

Looking ahead, we are satisfied that the company will get to grips with Family Dollar in the medium term. Over 1,000 store refurbishments are scheduled for 2019 and around 200 stores will be re-bannered to Dollar Tree. There is also now more knowledge and a clearer strategy around how to shift the proposition to cater to the needs of both urban and rural consumers. These are positive steps, but as Dollar Tree is making the corrections in a very competitive market we believe results will take some time to filter through to the top line, and in the short term increased expenditure may put further pressure on an already challenged bottom line.

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