Abercrombie Shares Plunge on Lowered Outlook
● A&F joined the growing list of major retailers reducing their forecasts for the year amid higher costs and inflation.
Abercrombie & Fitch Co.'s shares nosedived Tuesday as the retailer reduced its outlook for the year after higher costs cut into its bottom line in the first quarter.
Shares closed down 28.9 percent, or $7.64, to $19.09 on Tuesday.
The decline came even though firstquarter sales were better than expected. Abercrombie, operator of the Abercrombie & Fitch, Abercrombie Kids, Hollister, Social Tourist and Gilly Hicks brands, is the latest in the growing list of major retailers — Walmart, Target and Kohl's among them — calling out the higher costs of freight and raw materials, as well as the nation's highest rate of inflation in four decades for forcing consumers to hold back on spending. The volatile stock market and the war in Ukraine have also cut consumers' willingness to spend, though A&F executives said their company's sales beat expectations.
For the quarter ended April 30, Abercrombie reported a net loss of $16.47 million, compared to net profit of $41.78 million in the year-ago period.
There was also an operating loss of $10 million and $6 million on a reported and adjusted non-GAAP basis, respectively, as compared to operating income of $57 million and $60 million last year, on a reported and adjusted non-GAAP basis, respectively.
Net sales rose 4 percent to $813 million from $781 million in the year-ago quarter. Abercrombie sales rose 4 percent to $383.9 million from $339 million, while Hollister's sales dropped 3 percent to $428.8 million from $442.4 million.
"Overall, we were pleased to deliver a top line of plus 4 percent. The consumer remains healthy and they're choosing our products, even when there is competition for share of wallet. They need to look and feel great and we are still seeing them getting out and willing to spend," A&F's chief executive officer Fran Horowitz told WWD. "With that said, inflation is coming at them rapidly so we have updated our outlook."
For the year, A&F now sees sales to be flat to up 2 percent from $3.7 billion in 2021, lower than its previous outlook of up 2 to 4 percent driven by a combined 200 basis point adverse impact from foreign currency and an assumed inflationary impact on consumer demand, partially offset by higher-than-expected sales in the first quarter.
Operating margin is seen in the range of 5 to 6 percent, down from previous outlook of 7 to 8 percent reflecting a combined 200 basis point adverse impact from higher freight and raw material costs, foreign currency, and lower sales due to an assumed inflationary impact on consumer spending. Mitigating these factors will be actions to drive AUR growth, reduce certain expenses and adjust inventory flows by region in response to current market forces.
For the second quarter, sales are now expected to be down low-single digits compared to the to fiscal second quarter 2021 level of $865 million. "We are bouncing around that area to start the quarter," Scott Lipesky, executive vice president and chief financial officer, told WWD.
Still, Horowitz said, "We are seeing positive store traffic in the U.S. and EMEA. People are out there shopping the malls. APAC is a separate issue." A&F's top two markets are the U.S. and the U.K.
Asked what's been selling best lately, Horowitz said that at the Abercrombie division, denim and dresses paced the sales gains. With the YBP active line, launched two months ago, "We sold out of a quarter of our SKUs in a few weeks. The response has been terrific. Active is still a very important growing sector, particularly for our consumer." The "Curved Love" fit for curvier bodies currently offered in denim will also be included in the YBP line in the near future, Horowitz said.
Dresses have been selling well at Hollister, she added, though the sales trend at the brand wasn't as strong overall as the Abercrombie brand last quarter.
On the brick and mortar front, Gilly Hicks recently opened its first freestanding store in Europe, in Centro Oberhausen, Germany, and in June will open its second European store, which will be on Carnaby Street in London. There is also a Gilly Hicks store in Columbus, Ohio.
Abercrombie's Social Tourist brand will launch within the next few weeks its first brick-and-mortar location which will be a "fun, experiential" pop-up off Melrose Place in Los Angeles, with influencercreated content, Horowitz said.
"We are staying close to our customers and executing to our proven playbook. We are stronger, smarter and faster than ever before," Horowitz said during the conference call with retail analysts on Tuesday.
Here is some of what executives said the company can look forward to:
• Continuing AUR increases.
• Staying less promotional despite a retail landscape headed for greater promotionality.
• Ordering and flowing in products earlier to keep inventory levels high to mitigate supply chain disruptions.
• Continuing to invest in the future, while striving to lower non-consumerfacing costs.
"We are not going to step back from key expenses driving the top line — marketing and technology. They're key to the long term," said Horowitz, during a conference call with retail analysts.
In addition, the company has accelerated store openings, to 60 this year, from 50 previously planned, while expecting to close 30.
On June 14, Abercrombie will hold an investors' day in New York to discuss its plans.
In a statement released with the first-quarter results, Horowitz said the 4 percent rise in sales to $813 million, was the company's highest first-quarter level since 2014. Results were driven by ongoing strength at the Abercrombie & Fitch brand, where global sales were above plan. Net sales at Hollister were in line with expectations," and were down 3 percent.
"By region, the U.S. continued to outperform, EMEA net sales returned to positive territory, [although] APAC was impacted by COVID-19 lockdowns in China. We continued to reduce our promotional activity, contributing to our eighth consecutive quarter of AUR [average price per unit retail] improvement. This was more than offset by higher-than-expected freight and product costs.
"Looking forward, we expect higher costs to remain a headwind through at least yearend," Horowitz added. "We expect freight relief in the fourth quarter as we anniversary increased air usage last year due to the Vietnam shutdown. We will continue to manage expenses tightly and are committed to finding opportunities to offset these costs while protecting strategic investments in marketing, technology and our customer experience, which should drive sustained, long-term sales growth.”
A&F will hold an investors' day on June 14 to discuss plans.