Items are displayed at an Abercrombie and Fitch retail outlet in New York. Abercrombie and Fitch reports earnings on Friday, June 1Earns Abercrombie and Fitch, New York, USA - 24 May 2018

Difficulties overseas aren’t dampening fourth-quarter hopes at Abercrombie & Fitch Co.

“We came out of the third quarter with momentum and a good strong ending to the quarter. There’s been a nice strong beginning to the fourth quarter so we’re headed into Black Friday with optimism,” Fran Horowitz, chief executive officer of Abercrombie & Fitch, told WWD on Tuesday.

Earlier in the day, the $3.6 billion A&F reported a decline in third-quarter net profit to $6.32 million from $23.91 million in the year-ago quarter. Net sales of $863.5 million in the period ended Nov. 2 were almost flat on a reported basis and up 1 percent on a constant currency basis compared to last year. Comparable sales were also near flat.

In the U.S., the Hollister and Abercrombie divisions combined posted a 3 percent comparable sales gain. This was offset by international comps of negative 8 percent.

The company missed Wall Street’s sales and earnings expectations, taking the share price down 2.6 percent to $15.91 at the close of the stock market.

Horowitz attributed the results to macro factors and difficulties overseas associated with Brexit in England, where Hollister has 25 stores and Abercrombie has four. Protests in Hong Kong and unfavorable weather patterns early in the quarter also hurt the business. “October weather turned more seasonal and the customer responded well” to its cold weather offering, said Horowitz during a conference call with retail investors and analysts.

The company believes the U.S. business will continue to outpace the international business in the fourth quarter though inventory is “well-balanced by brand and gender” for the holiday season. The company ended the third quarter with inventories up 3 percent and expects to end the year up low- to midsingle digits, and with a strong balance sheet.

A&F is forging ahead with its multiyear “transformation” strategy, largely involving renovations, relocations, opening stores and downsizing existing ones. The company is mining smaller footprints to attain higher productivity and opening stores with short-term leases to reduce risk. A&F, based in New Albany, Ohio, will spend $200 million on capital investments this year.

Tariffs are also impacting the retailer, but executives said they’ve haven’t raised prices and that they’re lessening exposure to the increasing costs of importing from China. By year end, about 16 percent of the inventory will be from China. Next year, the level is seen dropping to the low teens.

One high-profile maneuver is happening on Fifth Avenue in Manhattan where the long-standing Abercrombie & Fitch flagship by 56th Street is closing next year and relocating to the Hollister space on Fifth Avenue by 53rd Street. It will convert to A&F adults and kids. The A&F flagship, which is letting its lease expire, for several years was the scene of lines outside in the morning with shoppers waiting for the doors to swing open. The windows were always shuttered, adding to the mystique.

By vacating Fifth Avenue, Hollister will lose some sales and traffic but could make up the shortfall with its new store on 34th Street, which opened last September on the site of a former Charlotte Russe. “Thirty-fourth Street turned out to be a good opportunity,” Horowitz said. “It’s tracking to be one of the top-performing locations in our fleet.”

The company incurred $45 million in exit charges last quarter for closing flagships in big markets.

The transformation strategy also entails a more decentralized approach to operating overseas. The company recently restaffed its London and Shanghai offices and added regional heads. “We have a long-term strategy of growing internationally. We felt we really need to get close to customers,” said Horowitz, with improved product differentiation, marketing, pricing and promoting.

Overall operating income last quarter was $14.5 million, compared with $39.7 million a year ago. Operating income on an adjusted non-GAAP basis, which excludes pretax flagship asset impairment charges this year and legal benefits last year, was $24.9 million, down from $36.7 million a year ago, reflecting the adverse impact of changes in foreign currency exchange rates of $5 million.

For the fourth quarter, Horowitz said inventory is “well-balanced between nice key items and must-win categories.” She said denim has been performing well across genders and brands and she singled out curvy jeans at Hollister girls and Abercrombie women. Also performing is the “cozy and comfort” trend including sherpa sweatshirts and loungewear. Sweaters, A&F dresses and the Fierce fragrance were also among the bestsellers.

“There’s been a strong customer reaction on new products, particularly women’s bottoms, knits, dresses and outerwear, jeans, soft fashion bottoms and miniskirts.”

Gilly Hicks, the lingerie brand, is in the midst of a relaunch and seeing double-digit increases, Horowitz said. Gilly Hicks is carried at all 650 Hollister stores globally, and there are also some Gilly Hicks stores operated adjacent to A&F, while others have space inside the stores.

A&F has guided its gross margins downward for the fourth quarter in anticipation of a more promotional retail landscape than a year ago.

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