Last quarter Abercrombie & Fitch moved out of the ICU and into recovery – however it kicks off its new fiscal year with a clear indication that its health has deteriorated.
On the international front – including Asia – performance is undoubtedly weaker and despite the improvements, the brands do not have the traction and do not stimulate the interest that they do within the US. The price points in foreign markets are too high, something which has hampered the brand’s recovery.
The worsening of Abercrombie & Fitch sales is bad enough, but they also come off the back of a particularly torrid performance last year when total sales plummeted by 14 per cent and underlying comparable sales by 11 per cent.
The overall decline at the Abercrombie brand is particularly telling and reverses a year of gradual improvements to shrinking sales. Hollister’s performance was somewhat better, but even here previously positive growth has now turned flat. These declines, together with sharper discounting, have taken their toll on the bottom line where net income is negative to the tune of US$39.6 million. While this is an improvement on last year’s $63 million loss, it is a disappointing outcome given the progress that was being made.
Although A&F is moving its brands in the right direction, in order to attune themselves to the tastes and preferences of today’s young shoppers, this quarter’s torrid apparel market hindered that progress. The erosion came from a number of sources including a stronger dollar, more promotions and weaker demand. While a marked improvement on past collections, early spring and summer ranges were fairly lacklustre – especially at Abercrombie.
All of that said, there are still some signs of life – especially from the US business. Here, while underlying sales were down the pace of decline was shallower than in the prior quarter. Indeed, Hollister comparables increased within the US and both businesses saw margin improvements over the prior year. This suggests that many of the enhancements to the brands, especially to product and stores are continuing to deliver.
The question for the year ahead is whether Abercrombie & Fitch sales will improve or continue to worsen. On balance, a recovery is the most likely outcome, with the US business driving it. Stronger autumn and winter ranges, plus a payoff from better marketing as well as a slight recovery in overall market conditions for apparel bode well for the second half of the year. The near-term outcome for the second quarter is, however, a little less optimistic.
Despite all of this, the fact remains that A&F has much more work to do before it is returned to full health.
- Neil Saunders is CEO of retail analyst Conlumino.
