An Abercrombie & Fitch store.

As the retail world goes increasingly digital, flagships are losing their relevance. And Abercrombie & Fitch is shifting its course as a result.

“Those stores are really a legacy piece of the brand,” Scott Lipesky, senior vice president and chief financial officer of Abercrombie & Fitch, told investors at the Jefferies Consumer Conference held in Nantucket, Mass., this week. But he added, they’re “an outdated piece of the brand. It’s not the brand aesthetic that we’re trying to portray to our customers anymore.”

That’s why the retailer, which includes Hollister and Abercrombie Kids under the company umbrella, is moving away from the traditional flagship layout⁠ — which are typically larger stores found in prime locations and contain the largest assortment of goods⁠ — in favor of smaller format stores with more omnichannel capabilities. That includes digital features like buy online, pick up in store, ship-from-store and order in-store. “That’s really the backbone to the digital business,” Lipesky said.

In fact, Abercrombie’s digital business grew to more than $1 billion last year. But Lipesky pointed out that the smaller stores not only make more financial sense⁠ — since operating costs are lower⁠ — but the reduced assortment also makes it easier for shoppers to navigate and easier for the brand to connect with individual customers. It also improves the efficiency of the entire operation, allowing customers to get products faster.

“These [flagship] stores in total are a drag on comps and a drag on profitability,” Lipesky said. “But from a qualitative side, it’s also a drag on the brand experience.”

In an effort to turn the company around⁠ — shares are down more than 42 percent year-over-year — the retailer is reevaluating its store fleet.

In addition to closing the Hong Kong flagship in 2017, Abercrombie closed its Copenhagen flagship in March. Two months later the company announced it would close three more flagships: starting with the Hollister store in Manhattan, then Abercrombie’s Milan store by the end of the year and finally the Fukuoka, Japan, flagship sometime in fiscal year 2020. That will bring the total flagship count down to 15 once executed.

The company has also closed about 500 stores since 2010, exiting many C malls, or malls that are struggling to retain tenants as store foot traffic declines.

Still, investors remain fearful that closing so many stores, especially the larger stores, is a sign of continued weakness in a challenging retail environment.

Abercrombie’s stock fell 26.5 percent the day it announced it would shutter three more flagships, closing at $18.39 a share. The company has yet to regain its losses, with the stock trading just over $16 a piece on Tuesday, the day of the Jefferies conference. 

But Lipesky assured investors that a smaller store fleet signals a healthier company long-term.

“What happened in Hong Kong, is we have a big flagship, expensive, high street location,” he explained. “We put a bunch of money to build this thing out. But we were able to exit that location and move into a mall right down the street. It’s about a third of the square footage doing almost the same volume. So, that formula, multiplied times the 14 or 15 that we’re going to have left is a nice path forward for us from a productivity and a profitability perspective.”

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