Abercrombie Stock Soars on Strong Quarter

Retailer beats third-quarter earnings estimates with 40.5 percent net rise.

Faster flow, fewer logos, and a sharper focus on runway and street looks. That’s a big part of the fashion fix at Abercrombie & Fitch Co., which has appeared to turn a corner.

This story first appeared in the November 15, 2012 issue of WWD.  Subscribe Today.

On Wednesday, the $4.3 billion youth retailer reported strong third-quarter results. Profits shot up 40.5 percent to $71.5 million, or 87 cents a diluted share, from $50.9 million, or 57 cents, representing the highest earnings per share since 2007. EPS came in 28 cents ahead of the 59 cents analysts projected, driving the stock up more than 34 percent to close at $41.92 from $31.18.

Sales for the three months ended Oct. 27 rose 8.7 percent to $1.17 billion from $1.08 billion despite a 3 percent comparable-store sales decrease. Like other retailers, A&F is projecting a decline in comparable-store sales in the fourth quarter, with the impact of Hurricane Sandy baked into the forecast. A&F sees a midsingle-digit decline in the fourth-quarter comp, but, with business improving on several fronts, expects full-year profits per share of $2.85 to $3, better than the $2.50 to $2.75 forecast in August. A&F’s South Street Seaport store in Manhattan will be closed through the balance of the quarter. The overall sales impact from Sandy is $10 million directly from closures and from side effects.

“With the critical fourth quarter ahead and significant macro-economic uncertainties remaining, we continue to be cautious in our near-term outlook. But trust me, we are upbeat, engaged and highly motivated,” A&F chairman and chief executive officer Mike Jeffries said in a conference call.

“Merchandise initiatives are taking hold,” he said.

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A&F, which operates Abercrombie & Fitch, Hollister, abercrombie kids and Gilly Hicks, has been affected by new stores cannibalizing existing ones in Europe and scores of laggard locations in the U.S., though the company has been aggressively culling. Officials said 55 to 60 domestic stores are closing this year through lease expirations, and 180 will be closed from 2012 to 2015. With growth abroad being slowed, cannibalization should decline, they added.

Not long ago, A&F was overinventoried, overly dependent on logoed goods, and considered lacking in fashion. Jeffries clearly addressed the issue, stating, “Logos are a part of our business, domestically and internationally. We turn logos extraordinarily well,” though he acknowledged, “It is a business we try to contain. We don’t want to look like a logo store. The mission is to restrict that as a percent of our inventory,” and in terms of the size of the logos.

After seasons of being overinventoried, “We are working to become faster with conservative plans” which, as far as the inventory, calls for shorter lead times and a higher percentage of the open-to-buy devoted to “chasing current trends,” Jeffries said. The “chase,” he cautioned, is not without some downsides, such as the higher costs of shipping by air and concerns over quality issues arising with accelerated production.

“We are working hard to be different by brand,” Jeffries added. “We’ve invested more in brand-specific design talent, in terms of fashion component. We are reacting quickly to runway and the street. We have always paid attention to runway and street, but we are spending more time reacting more quickly. That’s a natural evolution. All those things are impacting our fashion assortments.”

Explaining the new cadence in current shipments, Jeffries said, “We delivered mid-October, had some fashion deliveries November week two, and you will see more December week one. That kind of rhythm is very exciting.” Previously, “We had too much inventory, and we weren’t flowing newness. I think we are flowing faster and better than ever.”

Jeffries disclosed little about bestsellers, though he did say “women’s tops are starting to see some traction. Knits are doing well. That’s a big inflection point in the business. If we can get female tops really steaming, we will be in good shape.”

He also singled out accessories for potential growth. “I’ve had a problem with many accessory categories because of the quality of the business. Much of it has been inexpensive trinkets. We now see an accessory business that can be a reflection of the quality of each of the brands. We will start to see rollouts in our accessories — as a matter of fact, this week — with bracelet presentations.”

Jeffries acknowledged the fourth quarter of 2011 through this year’s second quarter was challenging due to a spike in commodity costs, sharp deterioration of the macroeconomic environment in Europe, and “ending up on the wrong side of some merchandising planning decisions made in 2011.” However, “Our U.S. chain-store business posted healthy growth on top of a strong quarter a year ago, and we saw sequential trend improvement in our international business.”

Overseas, U.K. comps remained challenged, down in the high 20 percent last quarter; Scandinavia was a “bright spot.” The first Hollister in Hong Kong is trending positively, and there’s optimism in Asia as A&F increases its presence there. Stores in Belgium and Spain are running flat, and while volume is good in Japan, the profitability isn’t.

Some analysts characterized the third quarter as representing “a stabilization” of the business, particularly in the U.S. That didn’t go over well with Jeffries. “The notion that our U.S business has been in decline is just nonsense,” he said. “Although the U.S. environment remains tough, we have made consistent progress over the last three years and the numbers speak for themselves. U.S. chain stores have had positive comps for nine of the past 10 quarters, and including [direct-to-consumer], positive comps for each of the past 11 quarters.”

“Abercrombie & Fitch has significantly turned things around by flowing in newness much more frequently during the quarter,” said Jennifer Black, ceo of Jennifer Black & Associates. “While the men’s business outperformed the women’s, the company did see traction in women’s tops, with sweaters and knits improving.” She also cited A&F’s new CRM [customer relations management] program as providing a singular view of customers across channels and triggering more shopping. However, “the biggest call-out is the move away from logoed merchandise. This continued decline in logoed merchandise should significantly enhance and drive productivity levels.”

“A&F is at an inflection point, and we believe the negative earnings revision cycle has ended,” said Randal J. Konik, an equity analyst at Jefferies & Co. Inc. in a report.