A&F Posts Strong Quarter, Cites Potential COVID-19 Related Closings

Abercrombie & Fitch, skillfully navigating through the coronavirus but bracing for possibly more closures, posted strong third-quarter results fueled by digital growth, margin growth and some improvement at business in stores.

“We are encouraged by our results to date. Digital demand remains strong and most importantly, customers are responding very favorably to our new products and messaging,” Fran Horowitz, A&F’s chief executive officer, told WWD on Tuesday, just after the company reported that its net income rose to just over $46 million in the three months ended Oct. 31, compared to $7.5 million in the year-ago period.

Operating income rose to $58.6 million, from $14.5 million, and on an adjusted basis, rose to $65 million as compared to $25 million in the 2019 quarter.

Still, Horowitz said the company’s outlook is “tempered” by elevated shipping, handling and freight costs resulting from increased online demand, and the potential for another round of store closings in the U.S. due to spiking coronavirus cases. She said the company is “balancing cautious optimism” with the realities of the day. The company is planning the fourth quarter sales down five to 10 points.

Among the third-quarter highlights:
? Digital net sales increased 43 percent to $382 million and there were sequential sales improvements in the store base.
? Back-to-school business rebounded in September and October after weakness in August
? Permanent shutdowns of flagships and larger units, which dig into profitability and don’t project the updated image and intimate shopping experience A&F wants, were ahead of schedule.
? Executives have become increasingly bullish on Gilly Hicks.
? The supply chain kept up with the increased digital demand despite headwinds.

Third-quarter net sales, at $820 million, were down 5 percent from last year’s $863.5 million but beat expectations. Hollister sales were $476.7 million last quarter, from $514.8 million in the year-ago period. Abercrombie’s sales fell slightly to $343 million from $349 million.

A&F has been planning for different scenarios that could arise from COVID-19, Horowitz said during the interview. “We’ve had a tremendous amount of practice,” in coping with store openings, managing people and schedules, and enforcing safety protocols in the stores. She also said the company can readily shift product between regions, channels and countries, when it needs, too.

For the holiday 2020 season, “We’ve managed our inventories very conservatively,” Horowitz said. Promotions have been moderated to meet what’s expected to be a more evenly spread demand through the season, without the sharp sales spikes and troughs of past seasons, Horowitz explained.

This year, the company has set Dec. 4 as the cut off date for taking online orders that could be delivered to homes before Christmas. Last year, the date was in mid-December.

Horowitz said efforts and investments to support digital growth and build up omni-functionality, including curbside pickups, BOPIS, online orders in stores, digital ordering in stores, began before 2020 and are continuing. She noted that the company is adding a pop-up distribution center and additional carriers to help with anticipated increasing digital demand. Last year, A&F’s digital sales exceeded $1 billion, representing about a third of the business.

At Gilly Hicks there’s been “a tremendous response digitally. It picked up 100 percent two quarters in a row,” said Horowitz, and was lifted by the Gilly Hicks Go active line launched last quarter.

She also said Gilly Hicks freestanding stores will be opened, but no timing was given. Currently, the division has “carveouts” inside Abercrombie stores, and “side-by-side” shops, but no freestanding locations.

Across the Gilly Hicks, Abercrombie and Hollister brands, updated product and marketing resonated with existing and new customers. “We’ve seen a strong response to a lot of key categories,” Horowitz said, citing Abercrombie’s women’s denim, the 96 Hour collection which is designed for greater comfort and versatility, fleece, sweaters and skirts, as well as shorts and T-shirts at Hollister, and the Gilly Hicks sleepwear and the brand’s active assortment.

During a conference call with retail analysts, Horowitz said, “We’re excited about the significant white space that we see for Gilly. Based on its track record of sales and margin expansion, we are dedicating additional resources to accelerate growth and have shifted messaging away from promotions into storytelling.”

Overseas, all stores in the APAC (Asia Pacific) region are opened, half of the stores in the EMEA (Europe, Middle East, Africa) region are closed due to COVID-19, and four U.S. units, all in New Mexico, are closed.

A&F is nearing the end of its flagship closing process which began in 2016. The flagships were first launched in 2005 in Hong Kong. In addition to four early exits, the Brussels, Madrid and Fukuoka flagships will close in early January due to natural lease expirations leaving the company with eight operating flagships at year end, down from 15 at the beginning of the year. “Closing flagships is a critical part of our ongoing work to reposition our store network to more intimate enabled stores to better serve our local customer and represent our updated brand positioning,” Horowitz said. “Although we are exiting [flagship] stores, we remain committed to the markets they operate in.”

“As we approach the peak holiday selling period, inventories remain well-controlled and we have thoughtful plans in place to help us adapt to changing business conditions. As we have done since the start of the pandemic, we will utilize our proven playbooks to remain agile and provide the best omnichannel experience for our customers,” Horowitz added.

The company has recognized a pre-tax gain of $8 million in the current quarter related to flagship store exit activity, primarily due to a gain on lease assignment and updates to previously established accruals for asset retirement and severance obligations related to the four closures.

“For the fourth quarter, we are planning the business as follows: net sales to be down 5 to 10 percent, which assumes a deceleration from current trends,” said Scott Lipesky, senior vice president and chief financial officer, during the conference call. “Although pleased with quarter-to-date results, including ongoing strong digital growth, there are a lot of unknowns as we head into what are traditionally our highest volume weeks of the year. With COVID-19 numbers rising, there is the potential for a change in apparel demand and customer willingness to enter physical stores. Also, there is a looming possibility of renewed store restrictions and closures. We do not have certainty on when countries may reopen in Europe.”

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