Like all premium consumer products, abercrombie and fitch (ANF) sales hit a brick wall in the wake of the GFC. After delivering years of stable profitability, the company’s result for the full year to December registered a dramatic downturn. This only got worse in the opening quarter of 2009, with an uncharacteristic quarterly loss blotting abercrombie and fitch copybook.
As we discussed in our initial review though (see FAT169 for details), A&F is a well-managed business with a healthy balance sheet and strong brands that will underpin future growth as the recovery gains traction. The company’s current period of weakness boils down to an inevitable outcome from a cyclical downturn, rather than a fundamental change in trend.
In terms of the latest second-quarter result, abercrombie and fitch same store sales fell 30% through the three months to August 1 2009, in comparison to the same period last year. Total store sales contracted by 23%, from $845.8 million to $648.5 million.
While the gross profit margin remains a healthy 66.5% for the period, margins deteriorated rapidly through to the bottom line. Management’s cost-saving initiatives have reduced a number of variable costs, primarily in the area of staffing. However, these cuts have not proved sufficient to offset the debilitating impact of declining sales in the face of higher rent and depreciation expenses.
The company also suffered considerably from the impact of non-operating costs, with the exit of the Ruehl business incurring $23 million of lease termination fees. This served to hammer abercrombie and fitch bottom line earnings to a loss of $26.7 million. Management expects the Ruehl closure to generate total costs of $65 million, with the remaining $42 million hitting the earnings through the second half.
As Members may recall, the decision to launch the high-end Ruehl brand represents a lone blemish on CEO Mike Jefferies otherwise untarnished record. abercrombie and fitch launched Ruehl in 2004, aiming to capture the aspirational New York City lifestyle for females. Perhaps a better name would have been “Sex and the City Accessories”. Either way, the brand failed to gain traction and the GFC subsequently snuffed out any near term chance of success. Management announced the closure of the 29 loss-making stores in June 2009.
Despite the setback from Ruehl, the company overall is expanding, with an expected nine stores opening within the US through the course of 2009. This includes two Abercrombie, four Hollister, one Gilly Hicks, and two outlet stores.
In terms of management’s international growth strategy, the opening of the flagship Milan stores is on track for October, and December in Tokyo. The company also has a growing presence in Europe, with seven Hollister mall-based stores in the UK, one in Germany, and another in Rome.
Encouragingly, the international stores are proving successful through the same basic model as their domestic counterparts. There is no difference in terms of the retail experience between London for example and New York. This highlights the intrinsic value of the Abercrombie brands. Moreover, the international expansion strategy is easier and therefore less risky, given that there is no significant need for a different approach to individual markets.
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