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Friday, November 8, 2013

News Now! | Abercrombie & Fitch Future Business Plans, Q3 2013 Results...

In the preceding months, we have come to feel the beginnings of a monumental transition phase for the future of Abercrombie & Fitch Co. as we proceed well into the 2010s. Pragmatically, the most significant for the early years of this decade has been the introduction of the "smarter commerce" initiative in 2012 which brought on higher level business integration and relationship between company and consumer – the sophistication of cross-channel solutions including intelligent mobile commerce, advanced consumer transaction options, and the launch of The A&F Club and Club Cali establishing an expansive database of 1+ million and growing.

This year, the Company has faced considerable questioning and criticism over its relevancy and level of "cool" nowadays in comparison to what is now thought of as the golden A&F Co. of the pre-Great Recession Modern Era. This is more so concentrated in the American market where the Company notably harbors what is being perceived as a waning appeal in American pop culture and malls. This, nevertheless, can be more appropriately addressed as being affected by a continuously fickle, post-Recession retail environment; faster, altering trends and attitudes; and the coming wave of generational change in the consumer pool. However, internal, controllable factors in Company practices, in level of innovation and enticement of marketing and offerings, too, is crucial; though, it is something which has been considered lackluster, in intrigue, in recent times, even by devoted customers of the pre-Recession years.

Performance of Abercrombie & Fitch Co. as the 2013 Fiscal Year (FY) has progressed has been very trying:
  • The first quarter (Q1), which ended on May 4, experienced a total Company decrease of 15% (this including comparable store sales (CSS) and direct-to-consumer (DTC)) with a 14% decline in the US and -16% in international operations. "The first quarter proved to be more difficult than expected on the top-line due to more significant inventory shortage issues than anticipated, added to by external pressures. However, comparable sales trends progressively improved during the quarter and with the inventory headwinds largely behind us," read Company earnings release.
  • Q2 ended on August 3 and reported a total Company 10% decrease in CSS and DTC with -11% and -7% in the US and internationally, respectively. "The second quarter was more difficult than expected due to weaker traffic and continued softness in the female business, consistent with what others have reported. In that context we are planning sales, inventory and expenses conservatively for the remainder of the year. Despite the challenging environment, we are very pleased by strong growth in our direct-to-consumer business and continued strong growth in China. We have also made excellent progress on our profit improvement initiative during the quarter, and we now expect savings from this initiative to exceed $100 million annually. In addition, we are nearing completion of our long-term strategic review, and we are confident that this will provide us with a clear roadmap for sustainable growth in sales, profitability and return on invested capital."
  • Q3 ended on November 2 reporting yet another decrease in CSS and DTC: -14% for a Company total, with -14% and -15% in the US and internationally, respectively. Furthermore, the Company ended the quarter with a massive leftover of inventory of old merchandise and, for weeks, has been pushing aggressive discounts and offers to aid the predicament. (Competitor American Eagle announced in its Q3 FY2013 earnings that it was actually clean of inventory and earnings above expectations). "Our results [at A&F] for the third quarter reflect continued top-line challenges, with overall spending among younger consumers remaining weak. Until we have seen a clear trend improvement, we are continuing to take a cautious approach into the fourth quarter and are working to end the year with appropriate levels of fall carryover inventory. During the quarter, we completed our long-term strategic review, and believe that we now have a clear roadmap for sustainable growth in sales, profitability and return on invested capital."
Furthermore, discussion has been very much incrementing lately – across analysts and A&F community spheres – over the finally approaching February 2014 expiration of Michael "Mike" S. Jeffries contract as Chairman & CEO which is subject for renewal. For the first time ever since his foundation of the modern Abercrombie & Fitch Co., Mike has overseen a extremely difficult period in which he has managed to keep the Company afloat and rekindled after the Recession. Nevertheless, people across the world following the Company cannot help but be critical now of prior overconfident hubris; decline in fresh, boundaries-pushing, alluring marketing (of pre-Recession splendor); and the failure of now two retail concepts (RUEHL No.925 and Gilly Hicks)...and the regression of what were enveloping and unique retail fantasies at play in favor of a more basic, pragmatic mall format for all Company stores. Although the likelihood of Mike departing from the Company is highly unlikely – he would never go quietly; he is rather much needed to oversee stabilization throughout this transition; and he once said in 2004 he would not retire until he felt the Company was in optimal state for a future beyond him – sentiments over his passing in preference for a younger, progressive successor are very much echoed across the global Abercrombie & Fitch community.

In light of all this, and very much incidental with the timing, dramatically altering plans have begun rolling out in regards for the future of Abercrombie & Fitch Co....

RETAIL PRESENTATION & OPERATIONS

One of the significant leading points of the new changes is the implementation of window-display strategies across all Abercrombie & Fitch Co. stores. The original concept of an exclusive, intimate retail environment is being completely regressed in favor of, as aforementioned, a pragmatic mall store format in effort of resurging consumer traffic. Long gone have been the luxurious, romantic RUEHL No.925 "brownstone homes"; the lovely Gilly Hicks "beach manor houses" were recently announced to all be closed by the end of Q1 FY2014; and, begun in Q3 FY2013, the removal of all louvers over the front windows of Abercrombie & Fitch-branded stores will continue across the entire chain of Canoe stores.

The most dramatic alterations to storefronts will be for the Hollister Co. brand: we are to subsequently witness, within the following months in FY 2014, the disappearance of the globally-recognized and iconic HCo "surfer/beach shacks". It is really the initiation to the end of an era with the Hollister we grew up with and came to love...



Corporate, computer generated visual of the all-new HCo. store prototype.


Elements of higher-tier Hollister stores developed in the early-2010s (as seen with HCo Fifth Avenue and various other international locations) will now be applied beginning in the American market: "select, cost-engineered flagship elements," as it was put. As illustrated, the new frontage will provide great window space for window-display and views into the store. The entrance of this 2010s prototype includes the placement of electronic, video display technology visible to the passerby as well. Feed of Huntington Beach would be redundant as HCo stores already have interior video setups for that. Instead, we at The Sitch on Fitch believe the electronic display space at the entrance should be used for faster, innovative, and enticing advertising.

Full-priced stores with the new format will open as these new retail alterations occur; the Company-wide closure of underperforming stores will continue ahead; and outlet store penetration will be increased.

As for the Gilly Hicks division, it will from Q2 FY2014 henceforth only operate as a brand through direct-to-consumer e-commerce and via Hollister Co. retail stores.

INTERNATIONAL EXPANSION

Focus on international expansion from the mid-2010s on will be on great opportunities in China and Japan, Eastern Europe (namely, Russia), the Middle East, and Latin America...

In more recent detailed reports considering current trends, the Chinese economy is now anticipated to surpass the size of the American economy by around 2016. While the American economy will still remain the world's greatest in market value for decades to come, the Chinese entered the 2010s as consumers commanding an ever tremendously globally-influential power only to increment with the rise of China as a global superpower as we progress into the 21st century. It is already perceived of vital importance for internationally-operating retailers to initiate the establishment of successful operations in the Chinese market and to gain the appeal of Chinese consumers spending across the world as well.

Abercrombie & Fitch Co. first ventured into the greater Chinese market with the opening of its first Hollister Co. store in Hong Kong (a Special Administrative Region of the People's Republic of China); and then followed the first HCo. stores in mainland China before the historic 2012 arrival of the Abercrombie & Fitch brand on Chinese soil...nearly 100 years after Ezra Fitch traveled to the then-exotic land. The Company has continuously found incremental success with its Hollister Co. stores and A&F Hong Kong. Plans are set to open the first Abercrombie & Fitch store in mainland China (to be a flagship in Shanghai) in April 2014, and to also open the first A&F-branded mall store in China (which will also become the first-ever international A&F mall-based store). Ultimately, the Company anticipates operating a corporate total of 11-13 stores in China by the end of FY2014 with a potential of 100+ stores in the long run. Its Chinese operations are the only international with a potential to near, match, or surpass its American presence in sales by sometime in the far future. The Company has been providing specialized marketing and advertising in the Chinese market including the usage of the Sina Weibo social media platform.

Progress in Japan will continue on after having entered that market in 2009 to below expectations performance with the Abercrombie & Fitch brand. The A&F Ginza (Tokyo) flagship, while having witnessed the then-biggest opening for an A&F store, turned out to perform below all other global, preeminent locations; issues have been addressed since; and the location continues to perform well off and make improvements. The secondary flagship in Fukuoka, having opened in December 2010, has been gotten rid off after drastically terrible performance during its first year (FY2011). As progress is made in Japan, the first ever Hollister Co. store opened to overwhelming reception in September 2013. A second HCo. will open in December 2013 and the Company will continue a cautious approach in Japan with 3-5 HCo stores opening in the nation by the end of FY2014...long-term store potential is yet to be determined.

Furthermore, after its upcoming opening in Dubai being realized in joint venture with retail partners in the region, the Company also looks forward to opening in Mexico (20+ store potential), Brazil (20+ store potential), and Russia (10+ store potential) with its first-ever decision to franchise its stores for openings in those rising markets. Franchising has never been a part of the Abercrombie & Fitch Co. retail ethos in attitude of commanding exclusive, direct control over its stores. This rather curious (to put it politely) franchising move will be something to watch out for in terms of quality and atmosphere consistency. It actually goes against current rising trends with high-end fashion retailers of purchasing back their franchised agreements in favor of direct control across all regions of their retail operations.

MERCHANDISING

It has been recognized that Abercrombie & Fitch Co. has remained more closely fixated on traditional styling then the majority of its fast-fashion competitors embracing trends on a deeper level and who have gained more of an appeal to consumers in tune with the fast-changing fashion attitudes. This is more so true with womenswear and female consumers who've turned more and more to more affordable, fashion-forward retailers such as Forever 21 and H&M. Furthermore, in general, and as mentioned above, the Company has a massive remainder of old stock by the time of this post published, and it has been aggressively pushing major discounts and promotions to help in the preceding weeks.

For FY2014, the Company anticipates improving its margins and phasing out of aggressive discounts. This will come in combination with the planned introduction of full-price stores; greater penetration of outlet stores; and stocking more styles in smaller quantities (in contrast of smaller lines with greater quantities). By Spring 2014, Abercrombie & Fitch Co. will be implementing those strategies while also broadening diversity of its existing apparel's washes, colors and fits (including expanding the women's tops collections as to remain a relevant player in current competition, and it will expand size offerings for its womenswear lines for the first time in the A&F Modern Era). And while the Company tested out its first shoes offerings, in partnership with Keds, through its Hollister Co. brand, shoes will be offered at Abercrombie & Fitch by Back-to-School 2014 to also include an even more diverse selection of accessories. The goal is to increase fashion relevancy with the times while maintaining a profitable and healthy business merchandising flow.

There will also be a reduction in floorsets and/or floorset updates; increase inventory turns with improvements in inventory visibility and accuracy; and an evolution of presentation standards and markdown strategies. The Company also looks forward to evolving its logoing strategies.

DTC & ECOMMERCE

In continuation of the sophistication of its operations, the Company will test run the new ability for customers to order merchandise instore in select locations. A full rollout will commence in 2014 following the results of the Christmas 2013 pilot test run. Also, it is in consideration of ship-from-store options. The Company furthermore believes that 2-3 day shipping times is the "new normal" in line with the faster business and consumer interaction of the decade.

Following the alterations of the retail locations, the Company will be completely relaunching the individual websites for Hollister Co. and for Abercrombie & Fitch by Fall 2014 and Spring 2015, respectively. The Clubs for both brands will also be revamped in the near-future with a planned form of rewards program to be integrated into the system. The Company continues in the pursuit of enriching the online experience offered via its direct-to-consumer channels.



In conclusion, you are advised to recognize that we are in the early-stages of an unprecedented transition phase to set the stage for the remainder of the 2010s and on in a rapidly shifting, faster, and ever-integrated global environment...

Stay FIERCE!

Written content composed by C.E.R. for The Sitch on Fitch. Research by C.E.R. and contributor Cameron J. for The Sitch on Fitch.  Intellectual property violations prohibited.