Abercrombie & Fitch Co. has taken its first steps into the world of wholesaling.
Following up on a possibility discussed in February, when the company reported fourth-quarter results, chief executive officer Mike Jeffries told analysts on a conference call that the company will sell items from its Abercrombie & Fitch assortment, although not its Hollister brand, through U.K.-based online retailer Asos beginning with the holiday season.
“Given Asos’ strong and growing traffic, this partnership will enable us to increase brand consideration and engagement with an attractive margin structure,” Jeffries said during the call to review first-quarter results, which included a smaller-than-expected loss and higher-than-expected revenues.
Later in the call, Jonathan Ramsden, chief operating officer, said the company’s management is “continuing to discuss” the possibility of adding Hollister to the arrangement with Asos, which focuses on youthful fashion brands.
Asked if the wholesale initiative could be expanded to other customers, Ramsden responded, “I think it’s too early to say what will happen beyond that. As you know, we like to test pretty much everything we do, so we look at this Asos venture as being, in part, a test, and then we’ll go from there.…”
As of the end of its fiscal year last August, Asos shipped to 7.1 million active customers in 237 countries and territories around the world. Its annual revenues rose 39 percent to 769.4 million pounds, or $1.2 billion at average exchange, for the 12 months.
The entry into wholesale, following early confirmation of its decision to carry Keds products on the Hollister Web site, came as the company took a bit of a victory lap after months of turmoil, including the separation in January of the titles of ceo and chairman, with the latter taken by Arthur Martinez on a non-executive basis, following sustained pressure from activist hedge fund Engaged Capital.
In the 13 weeks ended May 4, A&F weathered a net loss of $23.7 million, or 32 cents a diluted share, more than triple the year-ago loss of $7.2 million, or 9 cents. Excluding costs associated with the now largely completed closure of its Gilly Hicks stores and restructuring initiatives, the adjusted loss came to 17 cents a diluted share, 2 cents below the 19-cent loss expected, on average, by analysts.
Revenues exceeded estimates, falling 2 percent to $822.4 million, from $838.8 million a year ago, against expectations of a $798.2 million total. Comparable sales were down 4 percent, with an 11 percent decrease in same-store sales softened by a 27 percent increase in direct-to-consumer revenues.
Jeffries noted that “comparable sales continued to head in the right direction and included significant sequential improvement in our female business and our Abercrombie & Fitch brand as a whole.”
Comps fell at all three brands, with Hollister’s 7 percent slide the steepest and A&F’s 1 percent decline the smallest. Abercrombie kids was down 6 percent.
Those declines weren’t only smaller than Wall Street had estimated, but compared favorably with A&F’s principal competitors among “The Three A’s” in the struggling teen retailing sector. In earlier first-quarter reports, American Eagle Outfitters Inc. reported a 10 percent decrease in comparable sales and Aéropostale Inc. a 13 percent comp drop.
Credit Suisse analyst Christian Buss maintained his “outperform” rating on the stock while raising his target price to $53 from $52. “Comps were better than expected, and spending and inventory control were solid, helping offset weak gross margins as the company worked to clear fall merchandise,” he wrote in a note to clients.
In the quarter, gross margin fell to 62.2 percent of sales from 65.9 percent in the prior-year quarter.
Stifel Nicolaus analyst Richard Jaffe was less impressed and maintained his “hold” rating on the stock.
“While the company is playing good defense by cutting expenses, results remain significantly below peak levels…as we question whether the Abercrombie brand remains relevant to today’s teenager,” he said, pointing out that, despite signs of improvement, last year’s earnings per share of $1.91 were 65 percent below the peak level of $5.45 achieved in 2007.
Investors found plenty to like in the quarterly update and sent shares up $2.02, or 5.8 percent, to $37.14.
Full-year earnings guidance was maintained at a range of $2.15 to $2.35 a share on an adjusted basis, with cost pressures easing during the back half of the year.
The company reported initial success with its new Hollister store design, which has been in the test phase since January. A&F now expects to have it in place in 75 to 100 of the division’s stores, including a small number of Canadian units, by the end of the fiscal year. Hollister has 456 stores in the U.S. and 129 in international markets.
The new storefront design has produced double-digit sales increases in the units in which it’s been introduced and “a substantially greater increase in traffic versus a control group,” Ramsden said.
In an effort to reaffirm Hollister’s ties to the Pacific lifestyle on which it was based, the company plans to open Hollister House, a beach house in Southern California that will be open through early August and used as a vehicle to support social media content.
Jeffries said that the A&F flagship in Shanghai opened in April and has exceeded forecasts. Four more stores in China are planned for this year, as is a local Web site and local fulfillment capability.
In the U.S., the company will continue to reduce its footprint as it plans to close 60 to 70 of its 840 locations “through natural lease expirations,” Ramsden noted, adding that the company has “significant flexibility” on real estate with 500 of its 840 U.S. leases due for renewal before the end of 2016.
Store opening plans include 15 full-price international stores and eight to 10 outlet stores both in the U.S. and abroad.
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