Abercrombie & Fitch (ANF) is trading higher (+8.5%) this morning after reporting Q1 (Apr) earnings results. You're probably familiar with Abercrombie & Fitch, but just in case, they are a retailer of casual apparel/accessories for young men, women and children. Its brands include Abercrombie & Fitch, abercrombie kids and Hollister Co.
The iconic Abercrombie & Fitch brand is meant to embody American casual luxury. The Hollister brand is meant to capture the carefree spirit of the endless California summer for the teen market. abercrombie kids creates smart, playful apparel for children ages 3-14. ANF operates approximately 900 stores under these brands across North America, Europe, Asia and the Middle East, as well as e-commerce sites.
One look at the stock price and you know ANF has been struggling. It was trading in the $32 range in March 2016 and it has been in a steady downtrend since then, it closed yesterday at $12.89. The brand has stumbled in recent years as it has failed to change with the times. A big part of its problem is that young people's tastes are changing. If you have ever been to an Abercrombie store, you would have seen the A&F logo everywhere. It's often in huge print on their shirts and sweatshirts. However, young people are moving away from logos, it's not as cool anymore as they would rather embrace individuality. Also, young people are moving to trendier/cheaper alternatives (Forever 21 and H&M) so they can change fashion choices more quickly.
Another big problem has been a sluggish and promotional retail environment generally with weak traffic trends, especially for mall retailers like ANF. Consumers are shifting more to online purchases which is hurting brick & mortar retailers like ANF.
To combat this, ANF has been making some changes. A big change was its CEO Michael Jeffries resigning in December 2014. Then the company went several years without a CEO as it did not find the right fit. That is until February 2017, when ANF finally hired a new CEO: Fran Horowitz, who was promoted from within. Ms. Horowitz has been instrumental in the turnaround of Hollister. She will work to reposition the Abercrombie & Fitch brand as well. Ms. Horowitz has served as Chief Merchandising Officer since December 2015. Also, CFO Joanne Crevoiserat was promoted to COO while continuing in her current roles. Arthur Martinez will continue in the role of Executive Chairman.
On a final note, before getting into the AprQ results, ANF announced on May 10 that, after receiving expressions of interest, it is in preliminary discussions with several parties regarding a potential transaction with the company. There can be no assurance these discussions will lead to a definitive agreement or that a transaction will be consummated. No further comment is expected until the discussions are concluded.
Turning to the Q1 (Apr) results, ANF reported a non-GAAP loss of $(0.72), which was slightly below market expectations. Revenue fell 3.6% year/year to $661.1 mln, which was above market expectations. Same store comps were down -3% in AprQ. Breaking it down by brand, Abercrombie was -10% and Hollister +3%, so it's clear the Abercrombie brand is where the troubles are.
ANF says it's encouraged by its progress across all brands, particularly in March and April as a whole, in an aggressively promotional environment. ANF is pleased with the performance of its largest brand, Hollister. Abercrombie comps were in line with internal expectations as the company is applying the learnings from Hollister's successes.
Looking ahead, the company anticipates the Q2 (Jul) environment will remain promotional, but it expects results to improve further in the second half of the year, as the company sees returns from investments in marketing and omnichannel. The international roll-out of full omnichannel capabilities, coupled with insights from multiple customer touchpoints online and in-store, including a rapidly growing loyalty programs, means ANF is better equipped to anticipate customers' needs.
In sum, this was a pretty good quarter for ANF with some nice revenue upside. It was also good to hear them say 2H17 would start to show improvement but expect comps to remain challenging in JulQ. However, comps should trend higher in 2H17. Also, there is a possibility that ANF gets acquired.