A&F FINDS A NEW LIFE BY AIMING ITS WEAPONS AT A YOUNGER SHOPPER
Byline: David Moin / With contributions from Jennifer Brady
NEW YORK — Abercrombie & Fitch has buried its past. Now it’s out to the bury the competition.
Breaking from the crowd of casual brands and retailers, A&F reported Monday that its fourth-quarter profits surged 75 percent to $20.5 million, or 40 cents a share, topping average Wall Street estimates of 38 cents.
It also disclosed plans to triple its store count, broaden its women’s assortment and layer on new categories, including luggage, home goods, intimate apparel and shoes. Also under consideration: a separate A&F children’s chain and a catalog operation.
A&F, one of the hottest specialty chains in the country, is, according to its executives, proceeding on a disciplined but aggressive growth path. After four years of repositioning, it’s a Limited Inc. turnaround story, as other Limited sportswear divisions, notably Express, continue to search for turnaround formulas of their own.
“There are certainly new businesses for the future, because Abercrombie & Fitch is a brand — a clearly focused brand,” Michael Jeffries, A&F’s president and chief executive officer, told WWD Monday. As a vertically integrated operation, “It’s not a traditional retail enterprise. We control all of the elements — the merchandise, the presentation, the marketing, the people in the store, the music, to create a total experience.”
Another key factor, he added, is that A&F is “rooted totally in casual classics, not trend-oriented merchandise.” He said, “It’s items put together that add up to total outfits.”
According to Jeffries, 28 stores are slated to open this year, and the 130-unit chain has a goal of growing 20 percent annually until it reaches 400 stores.
A&F was founded in 1892 as a purveyor of safari and fishing equipment and quirky items such as samurai swords and barber shop chairs. It outfitted an elite group that included Theodore Roosevelt, Charles Lindbergh and Admiral Robert E. Byrd.
Over time, ownership changed hands a few times, the image blurred, and the aristocratic crowd stopped shopping the store. But the reputation has not been forgotten.
Seeing a name with potential, The Limited bought A&F in 1988, and let it flounder until 1992, when new management with Jeffries was put in. Jeffries is a former Federated executive who later founded Alcott & Andrews, a women’s chain that cut a sharp career image but folded after building stores that were too big and costly. The Limited completed its initial public offering of A&F last September, offering 7 million shares to the public at $16 each, while hanging on to an 84 percent interest.
Jeffries has been gradually rebuilding A&F. There’s a new and larger design team with more than 30 employees and little of what A&F used to sell. Gone are the sporting goods, the offbeat items and the stuffier, mature and less casual merchandise, including dress shirts, ties and furnishings.
A different market has been identified focusing on classic and functional outdoor casual apparel for teenagers, college students and Generation Xers. Among the key items are khaki pants and baggy “Alpine” shorts, each priced at $49.50; $60 overalls; hiking shorts, $39.50; logoed caps, $22.50; indigo “Big” shirts with a generous cut, $54.50, and T-shirts with trims for $29.50. Last Christmas, doubleknit ski sweaters, and shetlands, priced $50 to $100, were particularly strong items.
Last month, A&F closed its Trump Tower store, reportedly due to anticipated rent increases and an image that didn’t fit with the chain. “We’re looking for other Manhattan sites, but we’re not rushing into it,” Jeffries said. “We’re not anxious to get into a money-losing flagship situation.”
Currently, A&F’s only Manhattan site is in the South Street Seaport, though sites are being eyed in SoHo and on Madison Avenue. Of the 400 units envisioned, 75 are seen opening in downtown locations around the country.
According to Michele Donnan-Martin, vice president and general merchandise manager of women’s, several classifications — including jeans, outerwear, dresses, sweaters and knits — will be broadened this year with new items.
On Monday, the company said operating income in the latest quarter gained 68 percent to $35.3 million from $21 million, its eighteenth consecutive quarter of profit improvement. In the year-ago quarter, A&F earned $11.7 million, or 23 cents a share.
Sales in the quarter ended Feb. 1 grew 31 percent to $139.2 million from $106.4 million and same-store sales rose 8 percent.
The company would not release net earnings for the year other than on a per-share basis. But based on the previous quarterly reports, net income grew to $24.6 million from $10.8 million a year earlier.
The company said earnings per share more than doubled for the year to 48 cents from 21 cents. Operating income nearly doubled to $46 million from $23.8 million.
Sales advanced 42 percent to $335.4 million from $235.7 million and same-store sales climbed 13 percent.
The report came out after the close of the New York Stock Exchange Monday where A&F stock closed up 1 to 17 5/8.
“The company’s shares do not fully reflect the company’s growing brand recognition, strong store-expansion opportunities of 20 percent annually over the next five years and anticipated EPS gains in excess of 30 percent during the 1997 back-to-school and holiday selling season,” said Thomas A. Filandro, retail analyst at Gerard Klauer Mattison, in a recent research report. He initiated coverage of A&F with a “buy” rating.
He added that the continued benefit from a greater mix of higher-margin women’s apparel “provides an engine for comp-store sales and operating profit growth over the next several years.”
The chain’s customer mix, according to Jeffries, consists of baby boomers and older individuals with a youthful spirit, as well as the Generation X crowd.
What further sets A&F apart from other chains is its high level of products with natural fibers, particularly wool and cotton, and its low level of markdowns. The store only runs four major clearance sales a year and in a given season conducts about 70 percent of selling at full price, according to the company. It’s further distinguished by calling its associates “brand representatives” who wear the A&F clothes and generally fall into the age bracket of the target audience and by labels that bear such slogans as “reliable outdoor wear” on shorts and “sun-warmed” on T-shirts.
While A&F has shed much of its heritage, “Past elements have helped us in creating the image for this new business,” Jeffries said. “We’ve maintained the quality image and have really tried to keep the thread of romance associated with casual outdoor merchandise.
“The factors we have identified in shaping the brand are longevity, quality, casual classic, American and a youth orientation,” he said.
Jeffries said Limited has made a determination that A&F is “a world-class brand that we are managing — never doing anything for short term.” Limited chairman Leslie Wexner, he added, “has been a big supporter of this business.”
A&F has been among the hottest specialty chains in the country, carving a clear niche in the casual crowd, selling classic American functional outdoor apparel. It’s roughly 20 percent higher priced than the Gap or Eddie Bauer, around even with J. Crew and Structure and roughly 25 percent lower than Banana Republic.
The future looks bright for A&F. It’s carved out a distinct image that capitalizes on the casual revolution and the demise of hundreds of specialty stores around the country, such as Aca Joe, Contempo Casuals, Merry-Go-Round, and the paring down of other chains including Petrie Stores, and even some Limited divisions.
But there are challenges. For one, there are many players in the casual arena and rising competition from Nike, Eddie Bauer, Nautica, Ralph Lauren, Tommy Hilfiger, J. Crew, Gap, Banana Republic, American Eagle, Pacific Sunwear and Urban Outfitters.
Also, for the stock to remain strong, A&F has some catching up to do. Operating margins, while very respectable at around 10 percent, are still lower than Gap’s and Banana Republic’s, which are in the mid-teens. Also, A&F’s sales per square foot at $354 are well below several other chains, but analysts say A&F could reach $500 a square foot. A&F stores have 8,000 square feet on the average, and post $2.8 million in annual sales, which is about 25 percent less than the higher-priced and dressier Banana Republic. However, A&F should hit higher margins as it grows in volume, buys greater quantities at better rates and adds more women’s items, which generally have higher margins than men’s wear.