Abercrombie & Fitch, showing progress in its transformation, beat fourth-quarter sales and profit expectations and is upping investments for growth.
A&F’s fourth-quarter net income rose to $96.94 million, from $74.2 million in the year-ago period. Net sales declined 3 percent to $1.2 billion reflecting the impact of about 6 percent due to the calendar shift and currency fluctuations. But comparable sales gained 3 percent.
The positive results posted Wednesday sparked a 20.4 percent or $4.35 increase in the stock to $25.70 in trading on Wednesday.
For the full year, net income rose to $74.54 million, from $7.1 million; total sales grew 3 percent to $3.6 billion, and comp sales rose 3 percent.
“We are building on the transformation initiatives begun in 2018,” chief executive officer Fran Horowitz told WWD. “This year is a continuation of a three-year journey.”
During an interview after the results were issued, Horowitz said the company posted its sixth consecutive quarter and second consecutive full year of positive comparable sales, and that digital sales topped $1 billion in 2018.
She outlined several projects and goals for 2019, among them creating 85 store “experiences,” including about 40 store openings as well as remodels, relocations and downsizings. That’s up from 67 store experiences in 2018. However, up to 40 stores will close. Fifty percent of the leases in the U.S. come due for renewal in the next couple of years, giving the company flexibility with transforming its brick-and-mortar.
Horowitz also cited a boost in capital expenditures to $200 million from $150 million last year, with $150 million allocated for stores and $80 million for digital and omni operations. They will include:
• Enhancements to the mobile platform and app, personalization, omnichannel capabilities and customer engagement through the loyalty program.
• A rollout of markdown and size-optimization tools.
• Additional Gilly Hicks “carve-outs” inside Hollister stores, as well as “side-by-side shops.” Gilly Hicks sells bras, bralettes, underwear, swimwear, lounge and sleepwear and was relaunched in 2017.
The $74 million in net profit for 2018 seems low for a $3.6 billion company. But Horowitz told WWD, “We’re on track to meet our profit objective outlined in our investor day conference in April of doubling the EBIT margin rate by 2020, from the 2.9 percent in 2017.”
She characterized the Abercrombie division as stabilized, and noted that Hollister and Abercrombie showed comparable sales gains for 2018 overall.
However, the company still faces challenges. There were fashion misses in women’s tops and dresses at the Abercrombie division, which the merchants, led by Kristin Scott president, global brands, are addressing. Flagships generally don’t perform as well as smaller stores, though less than 20 flagships remain, and tourism levels are still down. There has been speculation that the company may not renew the lease on its Abercrombie flagship on Fifth Avenue in Manhattan. There is also a Hollister flagship on Fifth Avenue.
At Hollister, sales in the quarter rose 1 percent to $712.9 million from $709.2 million, or 6 percent on a comparable basis. For the year, sales rose 6 percent to $2.15 billion from $2.04 billion, or 5 percent on a comparable basis.
At Abercrombie, sales declined 9 percent in the quarter to $442.7 million from $484 million and were negative 2 percent on a comparable basis. For the year, the brand’s sales were $1.44 billion, down 1 percent from $1.45 billion, but rose 1 percent on a comparable basis.
Jeans, pants, skirts, knits and fleece have been the strongest areas.
Asked how much digital sales could grow beyond the 30 percent penetration, Horowitz replied, “There is no finish line to the digital business. Consumers love our omnichannel experience.”
For fiscal 2019, the company expects net sales to be up in the range of 2 to 4 percent, driven by positive comparable sales and a net increase in stores; comparable sales are seen up in the low-single digits.
For the first quarter, the company expects net sales to be flat, and comparable sales from flat to ahead 2 percent.
“We ended 2018 on a strong note, recording our sixth consecutive quarter and second consecutive full year of positive comparable sales while exceeding $1 billion in annual digital sales,” Horowitz said. “I am proud of our team and all we have accomplished this year. Most importantly, while delivering on the top line, we drove gross profit rate improvement and operating expense leverage, resulting in 100 basis points of adjusted [earnings before interest and taxes] margin expansion and a 77 percent improvement in adjusted net income for the full year. We continue to keep the customer at the center of everything we do and are excited about the future of our brands. Our transformation initiatives are gaining traction and keeping us on track to deliver our previously disclosed fiscal 2020 targets.”
During a conference call, Horowitz cited Abercrombie’s “louder and more effective marketing voice,” a strong performance with the Abercrombie Kids gender-neutral collection, and strength in jeans, pants, skirts, knits and fleece. Abercrombie’s image and marketing has been toned down so it’s less “beefcake” and more inclusive.
About half of the retailer’s product production in China is migrating to other countries, in response to rising tariffs. China goods accounted for 25 percent of the company’s inventory in 2018. It will be less than 20 percent in 2019.
According to Abercrombie executives, the “vast majority of the store fleet is profitable with the majority of the units in A and B malls.” Over the last eight years, Abercrombie closed 475 stores. There are about 850 in the U.S. and abroad.