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Monday, February 20, 2012

180 Store Closings... A More Exclusive Abercrombie & Fitch by 2015

Promotions at Abercrombie & Fitch!  |  Image by Chris K for Reuters.
Used here for illustrative purposes only  |  (image source)
Jaw dropping? You read right. Abercrombie & Fitch Co anticipates that it will be closing up to 180 stores in the United States by the year 2015...

The news comes after the release of the fourth quarter (Q4) results for Fiscal 2011. In the earnings disclosure made on February 15, Mike Jeffries (Chairman & Chief Executive Officer) commented that  "our results for the fourth quarter were below our expectations in an extremely challenging environment." He is primarily referring to operations in America were Christmas 2011 was a competitive season of mass promotions - "a more aggressive promotional environment than expected" - with intense discounts dished out to lure in consumers during the holiday season. Not only that, but the Company also faced higher cotton costs. Furthermore, this winter season has been one of the mildest on record in the United States and this notably affected sales on items like outerwear and fleece (i.e. hoodies, sweapants, etc). In conclusion, there was a 56.1% gross profit rate - 750 basis points lower than Q4 Fiscal 2010.

However, that is not to say that Abercrombie & Fitch is "going down." The Company reported a record revenue of US$4.158 billion for Fiscal 2011!  Including American and international sales, the Abercrombie & Fitch brand experienced an increase of 3%. Despite this, though, gross profit rate for the year came in at 60.6%, or 320 basis points lower than Fiscal 2010. Sales are up, primarily because of the growth in international markets (a 63% growth!), but profits are down because of increases in average unit costs and markdowns.

So it is that the Company expects to be closing 180 stores, in America, by 2015, after overlooking the performance of its corporate-wide stores of 1,045 (by the end of Fiscal 2011; 28 January 2012). Underperforming stores will be shuttered. Also, the closings will not be exclusive to the Abercrombie & Fitch brand. They may also be affecting abercrombie kids, but less likely Hollister-branded stores. Nevertheless, A&F stores will make up a significant portion of the 180 closings.

The whole thing must not be completely taken as a bad thing. Times are changing in the consumer world. People used to shop more in stores than online. Now sales from e-commerce and mobile operations are higher than ever for Abercrombie & Fitch with the increase in the sophistication of online and mobile retail technology. Thus, it's not necessary to maintain under-performing stores at all - they can go. Furthermore, it is a move to improve profit; and the decline in store count, primarily for Abercrombie & Fitch branded, stores will enforce and further raise the exclusivity of the brand in the American market: "By closing more of these lower-tier, underperforming stores, we'll be able to lift up the entire brand, particularly A&F," offered Jonathan Ramsden, Chief Financial Officer and Executive Vice President of Abercrombie & Fitch Co.

Store closings may not be exciting (especially not to the employees), but we are currently witnessing a sweeping movement in the evolution of the A&F brand. Re-opened in 1992 as a youth fashion retailer, Abercrombie & Fitch experienced great expansion and peaked at 350+ store by 2008 before the global recession began. By then, the brand commanded a near-luxury image and international expansion commenced in world class cities. Now, as the 2010s unfold, the brand will continue its overseas plans in the luxury content while lowering its store count in the United States to likely under 200 stores. Online and mobile sales will continuously rise and e-commerce operations will be further refined with IBM 'smarter commerce'...and all this with the goal of maintaining profit and health. The result will be a future more exclusive Abercrombie & Fitch unlike ever before...

Stay FIERCE!