NEW YORK — Robert Singer is out to bring a touch of Gucci Group to Abercrombie & Fitch.
As the teen retailer reported a 23.1 percent jump in second-quarter income, Singer — the former Gucci Group chief financial officer who joined A&F as president and chief operating officer in May — was plotting how the company could continue to grow down the road. And, in his mind, there’s no better model than that of his former employer.
To Singer, A&F’s future relies on building brands and international expansion.
“I know that we are often fundamentally understood as teen retailers,” Singer told Wall Street analysts on Tuesday in his first quarterly call with the retailer. “I believe that we actually have much more in common with my other company — no names — and its peers in that our main focus is on building, maintaining and controlling our brands.”
Singer defended management’s decision to maintain higher margins during the quarter, a move which largely contributed to negative comparable-store sales results for June and July.
“We may continue to see comp-store sales declines from our more mature brands as we strive to maintain their aspirational qualities and their high margins,” said Singer, “but we will be able to continue to grow the company profitably through the introduction and development of new brands.”
Singer and other A&F management remained mum on Tuesday about one of those brands, Ruehl, which will roll out to four pilot stores, with the first opening this month and three to follow in September. A fifth store will open in 2005. The concept is seen as pitching slightly older than A&F and could compete with J. Crew and Banana Republic.
In addition to brand know-how, bringing in Singer may have been indicative of management’s desire to grow the company through international expansion. It’s a task that Singer, who has lived in Italy for over 20 years, indicated he was committed to. Singer also pointed to the growth of international sales in the company’s e-commerce division and strong sales at its stores in tourist-heavy cities such as New York, Miami, Los Angeles and San Francisco as evidence for the need to expand.
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“All are strong indicators that a carefully controlled international expansion of our brand should provide a profitable long-term growth opportunity,” said Singer.
It would be a bold move for A&F, which currently has no international stores. In chasing overseas growth, the retailer would join such competitors as Gap, H&M and Zara.
Despite the recent slowdown in comps, the company reported earnings gains for both the second quarter and first six months that exceeded expectations.
For the three months ended July 31, the New Albany, Ohio-based retailer saw earnings rise 23.1 percent to $42.9 million, or 44 cents a diluted share, exceeding Wall Street’s consensus estimate of 43 cents. Comparatively, the company reported earnings of $34.8 million, or 35 cents, in the year-ago period.
Sales increased 12.8 percent to $401.3 million from $355.7 million. Comps declined 5 percent for the quarter. Hollister continued to buoy results, posting the company’s only positive comp for the period at 4 percent. Abercrombie stores posted a comp decline of 6 percent while the kids business fell 9 percent.
“We did not blatantly market a big sale event as we have in years past,” said Michael Jeffries, chairman and chief executive officer, on the call. “We were deliberately less promotional in look and markdown rate compared to last June.”
According to the company, Internet sales were up 50 percent over the previous year, with international sales accounting for over 30 percent of that business.
For now, expansion remains centered on Hollister. “We estimate that the majority of the company’s square footage growth over the next few years is expected to be driven by the expansion of its newest concepts, Hollister and ‘Concept 4’,” wrote Smith Barney analyst Kimberly Greenberger in a preview of quarterly results.
“The [Hollister] product is priced approximately 25 percent to 30 percent lower than the core Abercrombie & Fitch brand and is more youthful in color, styling and fit, and is therefore more appealing to younger teens than the target A&F customer. Additionally, given the lower price points, this concept reaches a larger demographic,” she wrote.
However, Greenberger pointed out that Abercrombie has missed out on a huge growth trend across all its segments. “We note that A&F’s accessories business at each concept is significantly lower than specialty retail industry averages, particularly for ‘lifestyle’ retailers,” she wrote. “We estimate that accessories comprise less than 5 percent of A&F’s assortments versus an industry average of roughly 12 to 15 percent.”
According to management, keeping up with denim sales has been its biggest task. “Although we have increased the merchandising plan compared to last year, the business continues to turn faster than expected,” said Susan Riley, chief financial officer, during the call.
“At this point I believe we can be doing more business in the Abercrombie & Fitch men’s and Hollister girls’ businesses,” said Jeffries. “Based on our reads we are planning to be in a stronger inventory position in the better performing classifications by late August and September as receipts flow in.”
Looking ahead, management doesn’t expect to get a huge rebound from the back-to-school season. “Assuming a continuation of the second-quarter sales trend, coupled with continued investment in the business, we expect earnings will be similar to last year’s third quarter,” said Riley.
Jeffries also conceded the company was missing out on denim sales. “You were correct that we need more denim in the Abercrombie & Fitch mens’ business and the Hollister girls’ business,” responded Jeffries to an analyst’s question. “We are working very, very hard to build that inventory.”
For the six months, earnings rose 20.1 percent to $72.5 million, or 75 cents a share, against earnings of $60.4 million, or 60 cents, in the same period a year ago.
Sales jumped 15.8 percent to $813.3 million, compared with sales of $702.4 million last year.
Shares of Abercrombie on Tuesday closed at $33.46, or down 2 cents, in trading on the New York Stock Exchange. The company reported earnings after the market closed.