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A&F Says Need for Speed Paramount

Abercrombie & Fitch is hoping to recapture its merchandising cool and its operational superiority through emphasis on greater speed and more thorough testing.

Abercrombie & Fitch Co. is hoping to recapture both its merchandising cool and its operational superiority through emphasis on greater speed and more thorough testing.

Throughout a two-hour presentation to analysts Wednesday, A&F executives echoed the theme established by Michael Jeffries, chairman and chief executive officer, in his introductory remarks. He noted the “new need to be faster” would apply to areas ranging from product development and its supply chain to online order fulfillment.

The meeting came on the morning after A&F said third-quarter comparable sales declined 14 percent and that it would close its Gilly Hicks stores by the end of the first quarter of 2014 in favor of offering the brand in Hollister stores and online.

The discussion failed to elevate the views of investors, who took shares of the company down $5.18, or 13.5 percent, to $33.13 on Wednesday, the largest decline among U.S. issues tracked by WWD.

Shares of competing teen retailers Aéropostale Inc. and American Eagle Outfitters Inc. dropped 8.7 and 3.9 percent, to $8.40 and $14.65, respectively, during the day. However, American Eagle shares charged back in after-hours trading, jumping 12.8 percent to $16.53, when it boosted its guidance for third-quarter earnings to 19 cents a share, excluding noncash charges, based on better-than-expected margins for the period. Previous guidance had been in a range of between 14 cents and 16 cents.

In his presentation, Jeffries remarked that technology, “which has disrupted our industry in profound ways,” would play a key role in changes A&F plans to make to restore what had once been among the top operating metrics in the retail industry.

A&F enjoyed a compound annual growth rate, or CAGR, of 24 percent in the years between 1996 and 2007, when it hit $3.7 billion in sales. The CAGR figure has slumped to 15 percent in the years since 2008, with sales last year reaching $4.5 billion. Operating margins peaked at 21.3 percent of revenues in 2006 but, in the years since 2009, have languished in a narrow range of 8.3 to 8.5 percent.

Jonathan Ramsden, executive vice president and chief financial officer, acknowledged that the New Albany, Ohio-based specialty store group had lost market share, particularly among women, “as a new frugality triggered by the economic crisis has driven customers to new, affordable fast-fashion brands and to emerging channels like outlets.”

The pressure from emerging businesses has made “the teen apparel space much more promotional. Looking ahead, it is clear that we have to win back and reengage lapsed customers, particularly on the female side of the business, and we need to do this while getting our [average unit retail prices] back up.”

To do that, A&F plans to work to speed product development, to test merchandising ideas with consumers more rapidly and frequently and increase its style differentiation.

A&F’s omnichannel efforts have been global, profitable and fast-growing in recent years, with online revenues expanding from $300 million in 2009 to about $700 million last year. A&F plans to devote a high percentage of its capital expenditures in the next few years to its direct-to-consumer efforts. A relaunch of the Hollister site is scheduled for fall 2014 and a similar treatment is planned for A&F’s site in spring 2015.

Billy May, group vice president of e-commerce, digital and customer relationship management, said that the sites will undergo an expansion of their stockkeeping units, and a compression of fulfillment times, as A&F looks to compete more effectively with pure-play operators like Amazon and Asos.

Additionally, its online efforts will include more collaborative initiatives, such as the one undertaken with Keds during this year’s back-to-school season. That program, he noted, yielded an 80 percent sell-through at full price during a three-week period.

International’s penetration of e-commerce is currently about 25 percent, a figure that could double by 2017. The company boasted of operating 46 Web sites shipping to 120 countries and doing business in seven currencies as well as in nine languages.

Still, he cautioned that technology alone won’t attract shoppers. “It’s our belief that customers do business with brands, not channels,” he said.

Declining to provide specifics, executives confirmed that A&F would continue to reduce its U.S. store count, with more of a focus on Hollister closures than there has been in the past. Excluding the shuttered Ruehl brand and Gilly Hicks stores now set for closure, the domestic store count has shrunk from 1,014 in 2009 to 845 at the end of last year.

Ramsden noted that new stores will be not only smaller but will have both new storefronts and a higher percentage of space devoted to selling than in the past.

International store expansion will be focused on Asia, with seven stores in place in China and at least 11 expected to be open by the end of the current year. The long-term potential for the market is seen as more than 100 stores.

The firm also sees the potential for at least 20 franchised stores in both Mexico and Brazil and more than 10 such stores in Russia.

Jeffries called A&F’s entry into the international business, which generated $1.4 billion in sales last year, a “game-changer” and compared its impact on the company’s growth to that of technology.

“While our international business has not been as strong recently as it has been historically, the business is still very profitable despite a depressed macro environment, particularly in Europe,” he said.