Maybe Abercrombie & Fitch Co.’s board was right after all when it decided to pull the company off the market.
Earlier this year the company’s board had discussions with potential buyers interested in acquiring the firm, but last month elected to discontinue those talks.
Fran Horowitz, chief executive officer of the specialty chain, said in an interview the company’s board concluded that the best action was “aggressive execution on our strategic plan, as evidenced in our Q2 results.”
And even though the retailer on Thursday posted a slightly wider loss for the three months ended July 29, adjusted EPS and revenues bested Wall Street’s consensus estimates.
The loss was $15.5 million, or 23 cents a diluted share, but on an adjusted basis came in at $11 million, or 16 cents per share. Revenues dipped by 0.4 percent to $779.3 million, and consolidated comps were down by 1 percent. By brand, comps were up 5 percent for Hollister and down 7 percent for Abercrombie. The quarter’s comps also represented the third consecutive quarter of sequential comparable sales improvement.
Wall Street was expecting an EPS loss of 33 cents on revenues of $758.6 million.
Shares of Abercrombie ended the day’s trading session up 17.1 percent to close at $11.25.
The company expects to close 60 stores in fiscal year 2017 through natural lease expirations. It has closed 400 stores since 2010.
Although still in the very early stages, especially for the turnaround of the core Abercrombie & Fitch brand, Citi Research analyst Paul Lejuez said the quarter showed some signs of stabilization, particularly at Hollister.
Jefferies analyst Randal J. Konik said the healthy second-quarter beat was “driven by top-line upside at both brands, and the third consecutive positive comp at Hollister. We are encouraged by what appear to be signs of sustainable progress at Hollister,” noting that the Abercrombie business appears to be “moving in the right direction as well.”
Horowitz said that the company is “adapting and executing better and faster,” ensuring a more consistent delivery of the right product in a timely manner with the right brand voice and brand experience for both brands. She explained that “better and faster” are due to the senior team members being “more seasoned in their roles.” Further, while the company has had an “agile sourcing ability, it was more of a matter of us activating that by making quicker decisions in order to really maximize that opportunity,” the ceo said.
Other actions include staying close to the consumer — the management team has been spending time in the stores talking to consumers and store associates — to understand what they want. According to Horowitz, that has helped improve the merchandise offerings, as well as the thinking on bigger ideas as to what to chase in terms of product trends that could have a bigger and more meaningful impact on the overall business. She said the fashion trend currently includes a “knit” cycle, and that the company can deliver product in the category with a 40-day lead time.
For the second quarter, the ceo said there was improvement across both genders for the Abercrombie brand. In addition to the consumer responding to knit tops, there was “nice traction” with the company’s recently launched denim line. Other fashion trends that saw strong reaction were destroyed in denim and off-the-shoulder tops. According to Horowitz, “We continue to see the beginnings of an emerging trend in embroidery and ruffle.” The embroidery detailing is for both tops and denim.
Presuming that the team is reacting better to what the consumer wants, comps for the back half also would be an easy beat for the company. Horowitz said that from an inventory perspective, A&F is making sure it has the right product in stock. That would compare with last year when “in the back half we disappointed the consumer,” the ceo said. She was referring to how the company was out of stock — such as size and color — for in-demand merchandise, and was overstocked in fashion that didn’t resonate with shoppers.
The company also has had a greater focus on customer engagement in the quarter. The ceo said, “Our marketing activities focus on the customers’ discovery process prior to each purchase decision. We really believe in positioning our brands for pre-purchase. This applies to both the A&F and the Hollister consumer.”
The new loyalty program for the Abercrombie brand called A&F Club membership had more than 2.3 million members at the end of the quarter. Horowitz said membership continues to grow at a healthy clip. Data tracking on engagement is still in the early stages since the loyalty program was just introduced, although it is taking learnings from Hollister — which began its turnaround initiatives about a year before the core Abercrombie brand — and applying them to Abercrombie.
At Hollister, the loyalty program Club Cali had 6.6 million members at the quarter’s end. Brand engagement media incorporated music, mobile video and gaming. That combination through special events and collaborations provided multiple experiential touch points with members, while incorporating unobtrusive product placement that allowed for discovery by members.
Horowitz said during a post-earnings report conference call to Wall Street: “By being present in their natural digital environment and providing an opportunity to engage with the brand outside of a transactional relationship, we are positioning our [Hollister] brand to be top of the line pre-purchase.”