It’s turbulent times for retailing yet Abercrombie & Fitch is proceeding on course with its transformation strategy for the future.
“We’ve got to stay focused on the long term. Our brands are getting stronger and we are excited about the long-term future for each brand,” A&F chief executive officer Fran Horowitz told WWD on Wednesday.
“From my point of view, 2019 was a complicated year with lots of macro issues. We have new complications at hand and learning something every day about them,” Horowitz said, referring to the coronavirus.
On Wednesday, A&F reported declines in net income to $83.1 million in the fourth quarter ended Feb. 1 from $96.4 million in the year-ago period, and to $45.96 million for 2019 versus $78.8 million in 2018. The declines largely stemmed from $47 million in charges from closing flagships, particularly the Hollister flagship in Manhattan’s SoHo, foreign currency changes and China tariffs.
The retailer saw momentum late in the holiday season, pushing sales up 3 percent in the quarter to $1.18 billion from $1.15 billion, and comparable sales up 1 percent. Bestsellers in all brands and genders were outerwear, denim, girls tops, as well as the Fierce fragrance, abercrombie kids and Gilly Hicks. Asked where improvement is needed, Horowitz cited Hollister girls merchandise.
For the year, net sales of $3.62 billion increased 1 percent and comparable sales rose 1 percent.
Top and bottom line results exceeded expectations, lifting A&F stock up 9 percent or $1.13 to $13.82 on Wednesday.
“We finished the year on a strong note, with record Black Friday week results contributing to net sales growth and positive comparable sales for the fourth quarter, and for the third consecutive year,” Horowitz said. “Consistent with recent trends, Abercrombie outperformed Hollister and the U.S. outperformed international, which although still lagging registered significant sequential improvement.”
Unlike other retailers, A&F baked the potential impact from coronavirus into its first-half 2020 outlook. Net sales are seen flat to up 2 percent, with the COVID-19 impact ranging from $60 million to $80 million and foreign currency exchange rates impacting approximately $10 million. Comparable sales are seen down low-single-digits.
Gross profit rate is seen down 50 to 70 basis points as compared to the fiscal 2019 rate of 59.4 percent, reflecting impact from COVID-19 and changes in foreign currency exchange rates.
For the current quarter, the company expects sales down mid-single digits, reflecting adverse impacts from COVID-19 in the range of $40 million to $50 million and currency exchange rate changes of about $5 million. Comparable sales are seen down mid-single-digits due to the virus. Gross profits are seen down 100 to 150 basis points reflecting the virus and exchange rates.
“In the near-term, we are actively monitoring and reacting to COVID-19, with the health and safety of our global employees, customers and partners remaining our top priority,” Horowitz said. The company has temporarily closed its Shanghai regional home office and stores in mainland China and the Milan area and is heeding travel restrictions.
A&F said the APAC region contributed less than 10 percent of 2019 net sales, with mainland China and China’s Hong Kong Special Administrative Region combined representing roughly half of this.
A&F has been reducing its manufacturing exposure in China and anticipates disruption of deliveries across the global supply chain though the company has not yet seen meaningful delay in production.
Between the coronavirus and the U.S. presidential election, there’s “significant uncertainty” on how business plays out this year, Horowitz said. “We operate in 20 countries around the world. Each is seeing some level of impact” from the virus. “The supply chain is getting back up and running. We are optimistic we are getting past delays and are looking for different options on transporting goods.”
Regarding the transformation strategy, A&F is in the second phase involving “growing while transforming.” The last phase is about accelerating growth. “In retail, there is no finish line. Transformation will always be part of our culture,” Horowitz told WWD.
Last year marked the second full year of the company growing while transforming. Over the past two years, A&F orchestrated 157 “store experiences,” including openings, relocations and renovations. Square footage declined 6 percent.
During a conference call, Horowitz said, “We are excited about all we have accomplished while cognizant that there is still work ahead. Our company has shown great resilience.…The coronavirus presented a new challenge. We are closely monitoring the situation, which seems to be changing daily if not hourly. We still look at Europe and Asia as long-term growth drivers.”
She said the U.S. store fleet is healthy. Ninety percent of the stores are in “A” and “B” malls with an average lease life of about three years. “That means we can be nimble,” the ceo said.
Through the life of the transformation, A&F will close a majority of its flagships. Fifteen currently remain, and three are expected to close this year. The A&F flagship on Fifth Avenue in New York was set to close but just renewed its lease for another year to mid-2021.