Macro headwinds and softening sales at Hollister pushed Abercrombie & Fitch Co. into the red for the second quarter, triggering the company to reduce its outlook for the third quarter and 2022 overall.
The New Albany, Ohio-based specialty retailer reported a net loss of $16.8 million, or $0.33 cents a share, for the quarter ended July 30, compared to a profit of $110.5 million, or $1.77 a share, in the year-ago period.
The retailer also reported an operating loss of $2 million compared to operating income of $115 million last year.
Net sales of $805 million were down 7 percent compared to last year on a reported basis, and down 4 percent on a constant currency basis.
Hollister sales fell 15 percent to $436.9 million in the last quarter from $514.5 million in the year ago quarter.
Abercrombie sales were up 5 percent to $368.2 million from $350.4 million in the year-ago period.
The stock market reacted strongly to the results and the revised outlook, pulling A&F’s shares down 5.6 percent, or $1.05, to $17.60 by midday.
Asked what the second-quarter performance suggests for holiday 2020, chief executive officer Fran Horowitz told WWD, “We see a divergency in the consumer, with the lower income customer at Hollister a little more pressured, and our outlook for the balance of the year assumes no change. Our outlook reflects that at Hollister we have some product to push through and have started to promote. At Abercrombie & Fitch, we have not had to to do that. There’s been lots of nice growth there. Abercrombie has been generating pretty nice numbers.”
While Hollister customers are being pressured by inflation, so are many of their parents, who in many cases are shopping for them, Horowitz said in the interview. The older customers shopping the Abercrombie & Fitch brand, based on the results at that division, seem less impacted by rising costs.
Like other retailers, Abercrombie & Fitch Co. saw sales softening beginning in late June and continuing through July, as a result of lower and middle income Americans pinched by inflation, particularly in essentials like food and fuel. Macy’s, Kohl’s, Victoria’s Secret and Target also saw significant sales declines last quarter and lowered their guidance for the year, as did Abercrombie & Fitch. Nordstrom and Walmart also lowered their guidance but experienced sales gains in the second quarter.
Industry-wide, sales trends are better in wear-to-work, occasion, and going out styles, including dresses, shoes and jewelry as well as products related to travel. Active and casual categories aren’t faring as well. “In the second quarter, we thought we bought enough dresses, but we sold out and wish we had more of them,” Horowitz said, adding that the company is hard at work shifting inventory to reflect rapidly changing consumer preferences. “From a business perspective, we are putting less emphasis on bottoms,” which have been soft, while dresses and tops have been selling well.
During the interview, Horowitz underscored that 92 percent of the company’s inventory is current, and that there are three components to the 92 percent — goods just set, long-life goods, and most importantly, goods in transit — about $140 million worth — for holiday.
Several retailers earlier this year ordered more merchandise than they actually needed, expecting that supply issues would delay some inventory and that an appropriate amount would arrive on time. However, with supply issues easing and consumer demand declining, retailers now find themselves stuck with too much inventory which they have to clear, meaning the third quarter will be super promotional, with markdowns taking down margins sharply.
Horowitz, however, told WWD that A&F Co. didn’t fall into the trap of over-ordering and just committed to goods earlier so they would arrive as needed.
Asked if the company will have enough staff to handle holiday traffic online and in stores, Horowitz replied, “We do a market-by-market assessment on what our pay rates need to be, to be competitive. We feel very comfortable about our distribution centers and stores being well staffed for holiday. People want to work for us.”
The company is now forecasting 2022 net sales to be down mid-single-digits from $3.7 billion in 2021 compared to the previous outlook of flat to up 2 percent, driven by an assumed ongoing inflationary impact on consumer demand. The outlook also includes an estimated adverse impact of about 200 basis points from foreign currency.
Operating margin is projected to be in the range of 1 to 3 percent, down from the previous outlook of 5 to 6 percent primarily reflecting lower sales due to an assumption of lower AURs (average unit retail price) needed to keep inventory current.
For the third quarter, net sales are projected to be down high-single-digits on the fiscal third quarter 2021 level of $905 million. The level assumes a continuation of recent trends for the rest of the quarter and includes an estimated adverse impact of about 220 basis points from foreign currency.
Operating income in the third quarter is projected to be around break-even with the year-over-year decline driven by lower sales and an assumption of lower AURs needed to keep inventory current.
In a conference call with Wall Street analysts, Horowitz said it’s currently “one of the most dynamic environments I have experienced in my 30-plus years in retail.”
She expressed confidence in the Abercrombie brand, citing its “amazing turnaround over the last three years and its evolved assortment and fit.…We see additional runway ahead.” Dresses, knits, jeans and men’s areas were strong.
Abercrombie & Fitch earlier this month unveiled a new store format for the Abercrombie brand, called The Getaway. It’s inspired by the sentiments felt before the start of a long weekend. Although the stores will still be called Abercrombie & Fitch, the design is intended to replicate a chic hotel lobby, and the merchandise mix is curated to appeal to the varied needs of a 25- to 35-year-old customer.
The first two Getaway stores opened outside Milan in the Il Centro Shopping Center, and at Los Angeles’ Del Amo Fashion Center. They are about 4,500 square feet and carry men’s and womenswear.
At Hollister last quarter, lower conversions and a lower basket size on average were seen. “Customers were doing more browsing than buying. Outside of dresses and men’s woven shirts, categories were being marked down. Demand moved out of bottoms into tops and dresses. Hollister inventory is slightly more elevated than we would like. We are right-sizing inventory levels for holiday and beyond.
“We have been faced with challenges in the past and we have consistently overcome them,” Horowitz said. “We have proven time and again our ability to evolve with our customer.…The balance sheet remains strong.”
In her statement released earlier in the day, Horowitz said, “As the global macro environment deteriorated in the second quarter, we experienced a divergence in brand performance. Abercrombie delivered its highest second-quarter sales since 2015 and its ninth consecutive quarter of average unit retail (‘AUR’) growth. This was more than offset by Hollister, where we saw a greater than anticipated impact from inflation and a shift away from core categories to more fashion-driven product, contributing to lower-than-expected conversion and basket size.
“We expect macro headwinds to persist and have taken action to adjust receipts across brands to fuel winning categories for late fall and holiday,” Horowitz added. “In addition, we have right-sized the Hollister inventory receipt plan for holiday and beyond. Looking ahead, we will continue to monitor sales volumes and react with agility to ensure inventory turns appropriately, and we expect year-over-year inventory growth to have peaked in second quarter and to moderate significantly in the back half as we lap late receipts from last year.
“Thus far in August, we have experienced a steady improvement in weekly sales trend, although total quarter-to-date remains in line with second quarter,” Horowitz said. “Our revised outlook reflects the uncertain environment for the back half. As we have successfully done over the last several years, we will continue to navigate near-term challenges and reduce spend where appropriate while executing to our long-term goals. We remain confident that we have the balance sheet and strategies in place to drive continued progress towards our 2025 ‘Always Forward Plan’ introduced at our June 2022 Investor Day.”