ON AUGUST 28, Abercrombie & Fitch Co. released its earnings report for the second quarter (Q2), of this 2014 fiscal year (FY), which ended on August 2nd. The results for Q2 have been a quite anticipated follow-up to Q1 FY2014 in terms of giving further color over how new initiatives for the betterment of the Company have taken hold now halfway through the year.
For the thirteen weeks, the Company generated a total of US$891.6 million in net sales at a -6% in comparison to its performance during the same period last year (Q2, FY2013) which figured US$945.7 million (it itself having experienced -1% (US$945.7) from the US$951.4 of Q2 FY2012 which factored in a peak in revenue for the second quarter since the Great Recession). Net sales improvement within the second quarter of fiscal 2014 paled in standing against the -2% (US$822) of the first quarter's performance as comparable to that same period last year.
Breaking figures down, net sales for Q2 FY2014, as comparable to the same period last year, were US$546 million (-9%) in the American market and US$345 million (-1%) internationally. Comparable store sales – stores whose performance is comparable for being in operation for a full year; excludes new stores – were down 8% in America and -16% internationally; total comparable store sales were down -11%. Comparable direct-to-consumer sales were up 5% in America and up 21% internationally (however, there was a slowdown for both in growth from Q2 FY2013's); total comparable direct-to-consumer sales were up 11%. Comparable (store and direct-to-consumer) sales were overall -5% in America, -9% internationally, and -7% in total for the Company.
By brand, Abercrombie & Fitch factored in US$349.6 (with a 1% decrease in comparable sales including stores and DTC), abercrombie kids factored US$70.9 (with a 6% decrease in comparable sales), and Hollister Co. came in at US$464.6 (with a 10% decrease in comparable sales).
With cost of goods at US$337.6 million (37.9%), Q2 FY2014 generated a gross profit of U$553 million which amounted to 62.1% of net sales. Gross profit, in proportion to net sales, declined from the same period last year with a basis point of 180 lower than last year "[This reflects] an increase in promotional activity including shipping promotions in the direct-to-consumer business. However, promotional activity was somewhat lower than we anticipated coming into the quarter leading to modestly higher gross profit rates than planned," explained CFO and Executive Vice President of Finance, Joanne Crevoiserat. This is comparable to Q2 FY2013's percentage of gross profit from total net sales – 63.9% – with cost of goods having been at (US$342.6) 36.7%.
With total operating expenses at around US$538 million, operating income came in at US$19.5 million (including other operating income, net, of US$4.3 million) up only by a slight margin from Q2 FY2014.
Conclusively, factoring interest (US$2 million) and tax expense (US$4.5 million), net income for Q2 FY2014 ultimately came to have the quarter stand positively at US$12.877 million (GAAP) up from Q2 FY2013's US$11.370 million (GAAP).
F I N A N C I A L F I G U R E S I N T H O U S A N D S
Q2 FY2014 |
Q2 FY2013 |
|
GLOBAL STORECOUNT
|
997 (by 28 Aug.2014)
|
1,057 (by 22 Aug.2013)
|
REVENUE
|
▼US$890,605
|
▼US$945,698
|
COST
OF GOODS
|
▼US$337,649
|
▼US$341,576
|
GROSS
PROFIT
|
▼US$552,956
|
▲US$604,122
|
OPERATING
EXPENSES
|
▼US$537,753
|
▲US$589,368
|
OTHER OPERATING
INCOME, NET
|
▼(US$4,290)
|
▲(US$4,411)
|
OPERATING
PROFIT
|
▲US$19,493
|
▼US$19,165
|
INTEREST
EXPENSE
|
▲US$2,020
|
▲US$1,750
|
TAX
EXPENSE
|
▼US$4,596
---
|
▼US$6,045
---
|
NET
INCOME
|
▲US$12,877 (GAAP)
|
▼US$11,370 (GAAP)
|
"In the past quarter, we believe we have made great progress in evolving the fashion component of our assortment, and this progress is clearly evident in our Back-to-School presentation. In a continued challenging environment, our sales for the second quarter were somewhat below plan, but we have seen modest improvement since the Back-to-School floorset. We are confident that the evolution of our assortment will drive further improvements going forward, in particular as we move past the headwind of adverse likes in our logo business as we work to strategically reduce that element in our assortment. Despite the challenging conditions, we were able to exceed our earnings expectations coming into the quarter through continued excellent progress on our profit improvement initiative. We remain highly focused on returning to top-line growth and driving long-term value for our shareholders." – Michael "Mike" S. Jeffries, CEO
Looking forward, the Company continues to maintain its outlook on full year, adjusted non-GAAP diluted earnings per share as falling within US$2.15 to US$2.35: "The guidance is based on the assumption that full year comparable sales will be down by a mid-single-digit percentage. The guidance also assumes a gross margin rate for the full year that is down slightly compared to Fiscal 2013, with average unit retail pressure and lower shipping and handling revenues partially offset by average unit cost improvement. In addition, the guidance includes an increase in interest expense associated with the refinancing of the Company's credit facilities, and a full year effective tax rate in the mid 30's, which remains sensitive to the mix between international and domestic income."
In regards to store openings throughout the fiscal 2014 year, Abercrombie & Fitch Co. now anticipates on 14 international full-price store openings (down from the 16 anticipated at the beginning of the year) by year's end; it includes 5 Abercrombie & Fitch stores and 8 Hollister Co. stores. Plans for 8-10 international outlet stores openings are still in to continue happening throughout the year. Furthermore, by means of natural lease expirations, around 60 stores are expected to close throughout the year in the American market and 6 will close in Asia.
A new Abercrombie & Fitch storefront is in development for test rollout to begin sometime in this third quarter of FY2014.
The first ever brand president for the Abercrombie & Fitch and abercrombie kids brands, Christos Angelides, will begin work in October. His first full quarter in work will be Q4. The search for the brand president for Hollister Co. is still ongoing.
Growth in China and Japan is strongly encouraging, and the Company looks to also introduce localized DTC for mainland China and for Japan and regional fulfillment from Hong Kong to all other Asian countries. Subsequently, localized fulfillment coverage will be more fully realized for the Company's major markets around the world. Further expansion in the Middle Eastern market will happen with more openings in Dubai and Abu Dhabi.
For all overall endeavors, around US$210-220 million are still expected to figure in as capital expenditure for FY2014.
Further onward, the Company looks forward to accelerating growth in China and Japan during the 2015 fiscal year. Development of operations in Mexico, Brazil, and Russia are still pending for takeoff. In regards to merchandising, a significant benchmark will be the expected virtually-100% discontinuation of the logo business by Spring 2015 to initially happen in the American market. It is by Spring 2015 when the Company anticipates the relaunch of abercrombie.com in updated all-new web format. Capital will also be allocated to the acceleration of expanding the introduction of the all-new Hollister and Abercrombie & Fitch storefronts throughout the year. The Company furthermore expects around the same rate of current store closures in the near-future as it continues to reach a balance with its storefront and direct-to-consumer operations in this evolving retail business environment now going into the latter-half of the 2010s.
After the release of the second quarter earnings, despite the evidence of improvements (albeit lukewarm), ANF stock, which almost neared US$46 (gaining its greatest peak yet this year) on the New York Stock Exchange the previous day, began falling to as much as 8.5% that August 28th. What may have contributed to this? The off-putting continued decline in comparable net sales and this time of a dip lower than Q1's comps and including a deceleration in DTC growth. Many had been expecting more promising figures and specially with the Hollister division – the majority of the greater Company business – which lowered more than the others and dipped far enough to even reach a double-digit drop percentage in sales (this ironic – or not so much, considering – given it's experienced the highest concentration of alterations and strategic promotional activities in the brands portfolio).
But what funnily came out from this earnings call to make news far and wide and overshadow even concerns in comps was the small mention by Mike of taking the logoing in merchandise to "practically nothing". That one little liner of the call. Immediately, media sources tripped over themselves to flood the internet with a deluge of articles peddling the "end of an era" with people like vultures almost even in relish of jumping to be a part of voicing out that the final decisive sign of the demise of the original spirit of the popular and exclusive kid on campus has finally arrived. Pathetic. It even hit as the number one trending topic on Facebook by the morning of August 29 in America and continued on as a trending topic to even make appearance, also, on the Bing.com homepage by late-night-August 29 / first-hours early-morning August 30.
Yes, logoing was major in the successes of A&F – and also of its competitors in the '90s and the 2000s – and is a major move and sign of changing times, but that is just it. Changing times. Don't be so ignorant and daft to be so dramatic. Please, it's almost comical. And, indeed, too. Neither is it a dramatic, sudden thing. Anyone who is an avid part of Abercrombie & Fitch and its community should well know that the logoing has been diminishing noticably and steadily over time. A remark of it getting to insignificance in the merchandise offerings in the near future should be of no shock at all. It's people who are on the outside – the haters, included – who act like its a sudden lightning strike and some even gloating on it. Just stop. You're an idiot. The only matter of discussion over the topic that should be is highlighting it as, truly as aforementioned, a phase of notable change in reflection of the greater scope of things right now in relation to times past. There are articles which do almost walk along with correct cultural/industry perspective but not really as all-the-while they sound like redundant, annoying record players rehashing woes past with hardly a sliver of fresh, original coverage and perspective.
There's an unyielding spirit at the core of Abercrombie & Fitch that has been a transcendent warrior for one-hundred twenty-two years hitherto and going strong. When people stop anticipating its great withering away and pass, now that will be the end of an era to raise a glass...
Stay FIERCE!
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