Abercrombie & Fitch (ANF 20.19, +3.07, +17.93%) opened sharply higher today
(+27%) after the company reported Q3 (Oct) results this morning. This quarter’s
success speaks as a testament to the progress that ANF is making in its attempted
ANF is a retailer of casual apparel and accessories for young men, women, and children. Its brands include Abercrombie & Fitch, abercrombie kids, and Hollister Co. During recent years, the brand stumbled under increased cultural scrutiny and failure to keep pace with changing trends in its industry. Given its core demographic, the company is compelled to ensure that its strategies reflect seriously on shifts in the tastes of young shoppers, but the company seemed to be slow to respond to several major changes. These include young shoppers’ increasing predilection, over perhaps the past decade or so, for apparel that embraces and expresses individuality; their preferences have been helped along by the growth of fast fashion retailers and other channels that provide trendy fashions at cheap enough price points that shoppers can afford increased flexibility with their fashion choices. Forever 21 and H&M are two notable competitors in this vein. At its peak popularity, the Abercrombie brand was generally known for focusing on logo-branded apparel offered at relatively upscale pricing points, with a historical reputation for luxury. Not only did cheaper alternatives and the waning of the perceived coolness of logos weigh on the company’s position, but increased online competition also presented challenges, as it led to declines in mall traffic, an area where ANF has high exposure, having long focused on presenting distinctive in-store shopping experiences.
With the company’s stock factoring in these competitive challenges, ANF did ultimately make some changes to combat these issues. Notably, the company’s CEO Michael Jeffries resigned in December 2014. The company then went several years without a CEO, not quite finding the right leadership fit until February 2017, when ANF finally hired a new CEO: Fran Horowitz, who was promoted from within. Ms. Horowitz had been instrumental in the turnaround of the company’s Hollister division, and now she has been working to re-position the Abercrombie & Fitch brand.
And the brand’s identity has begun to shift, including in terms of its target demographic; once listed as targeting shoppers aged 18 to 22, updated Abercrombie & Fitch brand descriptions have ticked that range up to 21 to 24-year old customers. Accompanying this are notable changes in the language with which the company identifies its own brand. Per the company’s historic 10-K reports, it previously emphasized that Abercrombie & Fitch was “the essence of privilege and casual luxury” and that it was “idolized and respected,” “youthful,” and “always cool.” In 2018, the same brand emphasizes instead that it suits “innovators, explorers and entrepreneurs” -- thus framing itself as a brand that is committed to an individual’s pursuit of uniqueness and selfhood -- while “remaining true to its heritage of expertly crafted products with an effortless, American style.” Per these adjustments, it seems that the company and its management are taking seriously an effort to re-position Abercrombie & Fitch as a mature brand that is in-touch with the “updated attitude[s]” and priorities of its customer base. To judge whether or not this and other strategies and their execution prove effective for the brand, some consultation of the company’s financial performance will be useful.
The market had been expecting a fairly sharp drop in
non-GAAP EPS growth for the company’s third quarter. However, ANF actually
posted EPS growth, which was not expected. Non-GAAP EPS rose 10% year/year this
quarter to $0.33. Revenue rose 0.2% year/year to $861.2 mln, which also was
better than expected.
Same store comps are always critical for retailers because this metric filters out the impact of adding new stores. It's a closely watched metric as it's a better indicator than total sales of the underlying health of a business. ANF posted OctQ comps of +3% (Hollister +4%, Abercrombie +1%).
This marks ANF's fifth consecutive quarter of comp sales growth for the company. It was the eighth quarter in a row of positive comps for Hollister and the fourth for Abercrombie. On the call, management noted that this quarter also marked the first time in nearly seven years that the company has delivered positive comps on top of positive comps, and ANF says that this positive momentum has carried into Q4 (Jan).
At Hollister, ANF delivered a +4% comp on top of an +8% comp last year, with growth across genders and channels. From a product perspective, ANF says that it's getting both faster and closer to its customer, which allows it to remain highly responsive to fashion trends and the growing demand for “wear now” product. Turning to Abercrombie, ANF is encouraged by the brand's progress.
A key strategy in ANF's turnaround has been to close underperforming stores. However, based on a combination of improved performance and better lease terms, ANF now expects to close up to 40 stores in 2018, a third fewer than was originally expected. By the end of 2018, ANF expects that it will have closed more than 450 stores since 2010, with approximately 60% of its U.S. leases coming due for renewal by the end of fiscal 2020.
In sum, this was an impressive all-around quarter for ANF. Probably the metric that stands out to us most is that ANF delivered positive comps on top of positive comps last year for the first time in nearly seven years. This led to EPS growth in the quarter when a pretty large pullback was expected. ANF also says that the holiday season is off to a good start; JanQ comps are expected to be up low single digits. With that said, investors should understand that ANF is going to continue to have some ups and downs in its turnaround, as turnarounds tend to generate bumpy rides. This was a good quarter, and while ANF has had some not-so-good ones also, the company does seems to have found the right track.