As Abercrombie & Fitch Co. warned early last month, it was not a good third quarter.
The teen retailer posted results that managed to beat Wall Street estimates, but then cut guidance for the full fiscal year as it expects a “difficult” fourth quarter. Still, shares of the company rose 3.5 percent to close at $28.81 in Big Board trading as investors digested chief executive officer Michael Jeffries’ comments about how fashion merchandise has showed some signs of resonating with teens.
For the three months ended Nov. 1, the company posted net income of $18.2 million, or 25 cents a diluted share, against a net loss of $15.6 million, or 20 cents, a year ago. Net sales were down 11.8 percent to $911.5 million from $1.03 billion last year. Comparable-store sales were down 6 percent for the core Abercrombie brand, down 10 percent for abercrombie kids and down 12 percent for the Hollister nameplate. On an adjusted basis, earnings per share were 42 cents, excluding certain costs. Wall Street analysts were expecting 41 cents a share on an adjusted basis on sales of $916 million.
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Jeffries said during the conference call to Wall Street analysts, “It is very clear that the young apparel sector in which we operate is going through a period of disruption and turmoil. In response to that, we are making significant changes across many aspects of how we operate as a company.”
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Those changes include shifting to a branded organization, major changes in its assortments, faster speed to market, new store designs and investment in direct-to-consumer and omnichannel, the ceo said.
The company has been injecting more fashion product in its mix as it cuts the percentage of logo product in its U.S. stores, although overseas stores still have a higher mix of logo due to the different timelines in the life cycle of the brand. According to Jeffries, there has been good response to the fashion products in the stores and “we continue consciously to underbuy it.” He also added that the company is still in a transition period: “We’re not used to selling fashion as well as we are. So we have to give people more confidence.”
As for fewer logo products, Jeffries said, “There’s no disputing that it’s been a big headwind for us, but we absolutely believe that de-emphasizing logo is strategically the right thing to do as we listen to our customers’ changing preferences.” He added that the company will “continue to review our assortment on an ongoing basis to determine the optimal mix of logo by brand, by geography and by channel. We think that there could be some opportunity as we look at the business that way. We are looking at it in great detail, but the headline is that logo is declining. We are looking to manage our way out of it, as efficiently as possible.”
Jeffries said he was confident that the company is making the right changes, is moving fast enough and that the changes will be enough to overcome the challenging environment.
In the current quarter, “lower-than-expected sales were compounded by a lower merchandise margin,” Jeffries said. Comps and tops were negative in the quarter, while “bottoms comped positively for the quarter, with denim continuing to do well and our dress business remained very strong,” he said. And while comps were negative across almost all international markets, they were positive in China.
“As we look to 2015, a number of factors give us confidence that we will see a significant improvement in our comp trend. This includes the abatement and neutralization of the logo headwind as we go through the year,” Jeffries said. He also noted that the company is testing new pricing strategies in Europe, which equates to about a 15 percent cut.
As for brand differentiation, that will be more noticeable “as we go forward,” noting that both Abercrombie brand president Christos Angelides and Hollister brand president Fran Horowitz have joined the company during the third quarter.
As for the recent Black Friday sales, Jeffries said the company saw a “pull forward of online from Cyber Monday to Black Friday. That was a big deal.”
The company expects conditions to remain difficult through the balance of the fourth quarter. With that in mind, along with third-quarter results, Abercrombie cut guidance for the full year, expecting adjusted diluted EPS in the range of $1.50 to $1.65. That’s a drop from prior guidance of $2.15 to $2.35. The company said the forecast is based on the assumption that fourth-quarter comps will be down by a mid-to-high single-digit percentage.
Wells Fargo analyst Paul Lejuez has shares of Abercrombie at “market perform,” noting that while “expense cuts can help mitigate Abercrombies’s problems, the primary shortfall is sales.”
Jefferies analyst Randal J. Konik said Abercrombie is an attractive investment opportunity for the long term as it “makes meaningful headway on its strategic repositioning.”