Abercrombie & Fitch now has confidence in its direction and progress

(Source: Abercrombie & Fitch / Facebook)

Abercrombie & Fitch ended its fiscal year with a bit of a flourish. In a step change from the last two quarters, sales rose by a solid 3.3 per cent or by around 5 per cent on a constant currency basis. This puts group sales for the full year around flat with last year, which is a respectable outcome given the strong growth the company generated during 2021.

Most of Abercrombie & Fitch’s success came from the Abercrombie division where sales rose by 13.8 per cent. A strong assortment of products for the holiday which were largely on trend helped to stimulate demand among shoppers who, while a bit more cautious, were still in the mood to spend on the right product. Our data show that the number of people using Abercrombie to buy holiday gifts increased over last year which is testament to both the range and the continued repositioning of the brand. The results at Abercrombie are especially impressive as they come against a backdrop of reduced store numbers, which the company has engineered to ensure it is trading in the right and most profitable locations.

Although the performance at Hollister – which posted a 4.4 per cent decline in sales – was nowhere near as good, it nevertheless represents a material improvement on the past two quarters when revenue dropped by low double digits. As an international brand, Hollister is more affected by the vagaries of exchange rates and when these are removed, constant currency sales were only down by around 2 per cent.

All of this provides us with some confidence that the division is moving firmly in the right direction despite the economic headwinds that continue to buffet its core consumers. Over the holidays this showed itself in a better assortment of products for special occasions which were well received by shoppers. On top of this, changes have already been made to the merchandising and management team at Hollister, which should help deliver a sharper performance over the year ahead.

Geographically, it remains clear that the US is the main engine of growth with sales in the region up by 9 per cent over the prior year. Sales in the international segment fell by 13 per cent, driven by particularly sharp declines in Apac and EMEA. Some of this is down to the strength of the dollar, but much is also a consequence of a more fragile consumer across many overseas markets. Unfortunately, this dynamic does not look like it will reverse itself any time soon – although Apac may pick up as China reopens – so Abercrombie & Fitch will need to lean heavily into its US operations to make up for this softness.

On the bottom line, net income for the group rose by a robust 80.8 per cent compared to last year. Some of this was helped by lower freight costs, which were very elevated in 2021, but much is a consequence of good cost control which has enabled operating costs to fall as a percentage of sales.

Abercrombie & Fitch put in the work to accomplish this early on and before the economy ticked down, and it is now reaping the rewards for its efforts. An area we have been particularly impressed with is the management of physical stores, where Abercrombie & Fitch has carefully and consistently assessed its needs in light of changing demand.

Looking ahead, Abercrombie & Fitch has forecasted prudently for the year ahead. Sales growth is expected to be in the 1 per cent to 3 per cent range – although this does include an additional week of trading, so underlying comparables may be slightly weaker. There will be some margin gains from lower freight and materials costs. Against what will be a tough backdrop we consider this a positive outlook from a company that has confidence in its direction and progress.

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