Abercrombie & Fitch (ANF) is trading sharply lower today (-24%) after the company reported Q1 (Apr) results this morning. ANF has been aiming to execute a turnaround, but this quarter definitely represented a setback in that effort.
ANF has been struggling in the apparel retail space, seeing challenges in its flagship Abercrombie & Fitch brand especially, although its Hollister segment has held up relatively well. As we have mentioned before, the company has stumbled in recent years while failing to change with the times.
A big part of its problem is that young people's fashion tastes have been changing, moving away from logos, which are no longer perceived as critical for coolness, and toward embracing individuality. In connection with this trend, young people have been gravitating toward trendier, cheaper alternatives, such as Forever 21 and H&M, that enable them to change fashion choices more quickly and affordably. Another big problem has been online competition, which has led to declines in mall traffic, an area where ANF has high exposure.
After a couple of years without a CEO, the company finally named Fran Horowitz as its new CEO in February 2017. She was promoted from within. Ms. Horowitz had been instrumental in the turnaround of Hollister, and her promotion was connected to the idea that she could also turn around the Abercrombie & Fitch brand.
Turning to the Q1 (Apr) results, ANF reported a non-GAAP loss as expected. However, at $(0.29), it was much better than last year's $(0.56) result, and it was much better than market expectations. Revenue rose 0.4% yr/yr to $733.97 mln, which was above prior guidance of $730.9 mln. So the AprQ results were quite good.
However, the guidance for Q2 (Jul) was quite weak. ANF expects revenue to be flat to up 2% yr/yr, which computes as $842-859 mln, which is well below market expectations. Addressing the softness of the JulQ guidance, ANF said on the call this morning that it's seeing some weakness with mall traffic. Full year revenue guidance was reaffirmed at +2-4%, which we compute as $3.66-3.73 bln.
In terms of same store comps, AprQ came in at +1% overall (+2% at Hollister and +1% at Abercrombie), within prior guidance of +0-2%. This is down a bit from Q4 (Jan) comps of +3% (+6% for Hollister and -2% comps for Abercrombie). It was good to see Abercrombie comps return to positive territory, although Hollister was hurt as it lapped a higher result from last year. JulQ comps are expected to be roughly flat. ANF also reaffirmed expectations for full year comps to be up low single digits.
In sum, ANF has been making some strides in its turnaround over the past year. However, this guidance for JulQ is spooking investors. There seems to have been some concern heading into this report, as the stock had fallen by around 17% since early May; it's now down another 24% today. ANF has been boosting its online presence, but it still has high exposure to malls, so if traffic is slowing, that will have a big impact on this retail chain.