Focusing on the consumer and not on store theatrics helped Abercrombie & Fitch Co. post third-quarter results that more than doubled Wall Street’s estimates.
Investors reacted positively to the results, sending Abercrombie shares up 25 percent on Friday to close at $24.37 in Big Board trading. Citi Research analyst Paul Lejuez noted that a portion of the spike in stock price could be attributed to short covering. More than 21.2 million shares changed hands, compared with a three-month average volume of nearly three million shares.
Arthur C. Martinez, Abercrombie’s executive chairman, in a telephone interview attributed a consumer-centric focus as one of several initiatives that positively impacted some key metrics in the quarter. That focus also resulted in giving ownership of store productivity to the individual store’s employees, a big change for the specialty chain.
“You have to go back to the starting point. It was an extremely rigid operating model, with no flexibility in product placement, fixture placement [or] construction of the labor effort going into the stores. One of the things we had was an uninvolved store management team that was not involved with the customer,” Martinez said of the concept and format under former chief executive officer Michael Jeffries.
At the beginning of this year, Martinez changed the store structure and made it more localized to the surrounding community. That gave the store teams flexibility in product placements and autonomy on in-store markdowns, not to mention localizing the inventory and environment to meet the needs of the local consumer.
He also instituted an incentive plan for the store employees, one that he said re-energized the business through greater interaction between associate and consumer instead of the former focus on presentation. “For many years, this company focused on the theatrics of the store. It didn’t make for an easy shopping experience….At one point there was a rule on how many registers could be opened versus how many customers were in the store. They were stupid, rigid rules. We took those shackles off. We said your job is to help the customer, make the sale and make the process as painless as possible,” Martinez said.
The chairman said the focus on local needs is also on the international front because a person at headquarters in Ohio isn’t going to know what is needed in a store located in Düsseldorf, Germany.
For the quarter ended Oct. 31, Abercrombie said net income was $41.9 million, or 60 cents diluted share, from $18.2 million, or 25 cents, a year ago. On an adjusted basis, diluted earnings per share was 48 cents compared with 42 cents a year ago. Net sales slipped 3.6 percent to $878.6 million from $911.5 million, but were essentially flat on a constant currency basis. Comparable-store sales slipped 1 percent. Wall Street was expecting adjusted EPS of 22 cents on sales of $864.7 million.
By brand, net sales for Abercrombie slipped 6 percent to $411.3 million and were flat for Hollister at $467.3 million.
For the fourth quarter, the company said it is projecting comps to be flat, and continued adverse effects from foreign currency exchange rates.
Martinez said, “Hollister is on track, but there’s still a distance to go. We’re not at the peak of our productivity. On a store-by-store basis, there’s still a big opportunity ahead. The issue at Abercrombie, and this is not a big systemic disease, when you drill down to domestic versus international, men’s versus women’s and tops versus bottoms, the center of gravity is the men’s tops business in the U.S.”
Martinez said the men’s tops category was the “specific cause” of the brand’s performance in the quarter. Other components of the Abercrombie business, from international to women’s to denim across both genders, all performed well, the chairman said. The new product line from men’s designer Aaron Levine is working its way through the pipeline and is anticipated to “make the fashion statement we need to make” in men’s, with tops near the head of the list, he said.
Jonathan E. Ramsden, executive vice president and chief operating officer, noted during the conference call to Wall Street analysts that the company’s “European business comped positively for the first time since 2011, with most of our individual stores comping positively.” He said the company is “pleased with the investments” it has made in mobile, which comprises about 60 percent of all online traffic and is “posting double-digit increases in conversion year-over-year.” He said the company now has close to three million cumulative downloads of its mobile apps. Further omnichannel investments are delivering strong returns, he said, adding that the company is looking forward to rolling out capabilities beyond the U.S. Abercrombie has made available click-and-collect in all of its U.K. stores during the third quarter. He also noted that the company did well on Singles’ Day in China, generating nearly $2 million in sales. Mobile enhancements in China are planned for 2016.
The company is still searching for a new ceo, although that might not be a top priority at the moment. Martinez said, “There’s nothing to announce. The team running the business day-to-day is doing a fine job. The board is taking a measured approach.” He said the focus for the “next eight to 10 weeks will be on driving the business.”