Abercrombie & Fitch ‘in recovery mode’
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Broadly, the latest set of results from Abercrombie & Fitch are to be welcomed: they are a sign that the brand continues to make progress in what remains a challenging market during a particularly difficult period of trading.
Across the quarter, total sales shrank by 1 per cent on a reported basis, although when currency fluctuations are removed that number turns into growth of 2 per cent. Across the group, same store sales increased by 1 per cent on a year-over-year basis, with particularly good gains coming from international operations.
There is also a reasonably positive story on the margin front where – despite a highly promotional environment and suppressed consumer demand- A&F saw gross profit as a percentage of sales drop by just 0.5 percentage points. The outcome here could have potentially been far worse.
Despite there being clear signs of progress, which includes a sequential improvement in most of the sales and profit metrics, A&F is still very much in recovery mode and the brand is still not yet back to full health. This is evidenced by the fact that although the sales outcome was reasonable, it came off the back of what can only be described as a tumultuous final quarter last year when total sales shrank by 14 per cent and same store sales dipped by 13 per cent.
Such soft comparatives flatter this quarter’s numbers and raise the question as to whether the better performance is a natural bottoming out, or if it is thanks to some of the corrective action that is now being taken by the management team. In truth, we think the results reflect a bit of both factors.
Future growth will be governed, in large part, by how successfully the brand is able to reestablish its connection with younger consumers. Over the past year there has been evidence that both Abercrombie and Hollister are moving in the right direction in order to attune themselves to the tastes and preferences of today’s young shoppers. Among other things this has involved a less brash approach to marketing, a more minimalist and modern style in terms of clothing collections, a brighter and more inviting in-store experience, and a move into high growth categories like athleisure.
“Future growth will be governed, in large part, by how successfully the brand is able to reestablish its connection with younger consumers.”
These things have won back customers who defected and have also secured new shoppers. Most notably, the shifts have also allowed Abercrombie to secure custom from a slightly older demographic with higher spending power; something that is useful given that spending on apparel from younger shoppers remains muted thanks to the vast array of other products and services they now buy into.
That noted, it is still far too early to say that brand loyalty has returned. At present many shoppers are rediscovering the brand and looking at it anew; as such their purchasing is patchy and occasional. While this is something A&F can improve on over time, it is unlikely it will ever regain the brand capital it once had: the market, consumers, and the competition have all shifted too much to allow that to happen.
This is one of the reasons why A&F’s action on retooling its business model and reassessing its space and store requirements is sensible. To meet the new pattern of demand it will need fewer stores coupled with a good online offering. While there has been progress made in terms of reconfiguring the store fleet, growth from online is somewhat less encouraging.
The upcoming year will continue to be one of reinvention. The current management team is strong and has the right mix of skills to make the necessary changes and reinvigorate the brand. However, they are up against a low growth, challenging environment which means that the play for the fiscal year as a whole is as much about holding onto current market share as it is about positioning the business for future growth.
Questions & Answers
Q.What is the primary reason for Abercrombie & Fitch still being considered in 'recovery mode'?
What is the primary reason for Abercrombie & Fitch still being considered in 'recovery mode'?
Despite recent improvements, the sales outcome came after a very difficult previous quarter where total sales fell significantly. This meant the current positive figures benefited from soft comparatives, indicating the brand is not yet back to full health.
Q.How is Abercrombie & Fitch attempting to reconnect with younger consumers?
How is Abercrombie & Fitch attempting to reconnect with younger consumers?
The brand is using a less brash marketing approach, more minimalist clothing, and brighter in-store experiences. They have also moved into high-growth categories like athleisure to align with young shoppers' preferences.
Q.What steps are A&F taking to adapt its business model for future demand?
What steps are A&F taking to adapt its business model for future demand?
A&F is retooling its business model by reassessing space and store requirements. This involves needing fewer physical stores and ensuring a strong online offering to meet changing consumer patterns effectively.
Q.Is the brand seeing strong growth from its online sales channels?
Is the brand seeing strong growth from its online sales channels?
While progress has been made in reconfiguring the store fleet, growth from online operations is described as somewhat less encouraging. This suggests it is not performing as strongly as other areas of improvement.
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