THE FINANCIAL PERIOD which oversaw the development of a new era, fiscal year 2014 (FY2014) at Abercrombie & Fitch Co. finally came to a close on January 31, 2015. From internal initiatives – what came to be a markedly unprecedented, historically gamechanging repertoire of actions – to the volatile external forces in the greater industry, it is the quantitative record of performance on the field during what was a landmark, decisive playout for the history books. The earnings disclosure for FY2014 was held on March 4, and we now take a concise look at the results with elaborative perspective...
Revenue (net sales) for Abercrombie & Fitch Co. figured in at US$3.744 billion (down 9%) for fiscal 2014: this represents a second, consecutive downward step in annual net sales – and has taken the Company back under the 4 billion dollar belt – following FY2013’s US$4.116 billion from the all-time peak of US$4.510 billion from FY2012. Overall, it’s the fourth occurrence of a decline in revenue for the Company and has created a set of two pairs of echoing annual net sales decline in A&F History in the Modern Era – FY2008 (US$3.540 billion) and FY2009 (US$2.928 billion) (both during the Great Recession) from the pre-Recession peak of US$3.749 billion of FY2007, and now FY2013 and FY2014.
Breaking figures down, net sales were US$2.408 billion in the United States (down 9%) and US$1.336 billion internationally (down 8%). By brand, this stands at U$1.450 billion through Abercrombie & Fitch, US$321.4 million through abercrombie kids, and US$1.948 billion through Hollister Co. (which slipped under the 2 billion dollar belt since first surpassing and generating net sales above the mark since FY2009).
Total comparable sales – measuring established business which operated in the full year; excluding new openings – for the Company were down 8% (breaking that down, store comps were down 12% though direct-to-consumer (DTC; online/ecommerce) comps were up 10%). Regionally, total comparable sales were down 6% in the United States (there, store comps were down 9% though DTC was up by 8%) and down 12% internationally (with store comps abroad down 18% though DTC up 13%). By brand, total Comparable sales were down 4% at Abercrombie & Fitch, down 7% at abercrombie kids, and down 10% at Hollister. Comparable sales exclude Gilly Hicks of which’s remaining storefronts were all closed in April 2014.
The decline in net sales is attributed by the Company as having been “driven by an 8% comparable sales decline, the adverse effects of changes in foreign currency exchange rates, and net store closures.”
FY2014 experienced a decrease in the percentage of gross profit from total net sales, 61.8% (US$2.312 billion), which factored in after a rise cost of goods at 38.2% (US$1.430 billion) of total net sales. This is comparable to FY2013's percentage of gross profit from total net sales – 62.6% (US$2.575 billion) – with cost of goods having been at 37.4% (US$1.541 billion). Gross profit year-to-year fell 10%.
With total operating expenses at US$2.215 billion, operating income came in at US$113.519 million (including other operating income, net, of US$15.239 million).
Conclusively, factoring interest (US$14.365 million) and tax expense (US$47,333 million), net income for FY2014 fell to US$51.821 million (GAAP) as comparable to FY2013's US$54.628 million which in turn was down from FY2012's US$237 million (GAAP).
The last quarter (Q4) of the 2014 fiscal year itself – which principally encompasses the Christmas fashion season and the phase-over pre-Spring “Spring Preview” period – performed at US$1.120 billion in revenue down 14% from Q4 FY2013’s US$1.299 billion in performance. Net sales were US$763 million in the U.S. (down 10%) and US$357 million internationally (down 20%). By brand, this was US$424.1 million through Abercrombie & Fitch, US$100.7 million through abercrombie kids, and US$593.5 million through Hollister. Total comparable sales for the Company during Q4 were down 10% (breaking that down, store comps were down 13% though direct-to-consumer (DTC; online/ecommerce) comps were up 1%). Regionally, total comparable sales were down 6% in the United States (there, store comps were down 10% though DTC was up by 4%) and down 17% internationally (with store comps abroad down 20% and DTC down 5%). By brand, total Comparable sales were down 9% at Abercrombie & Fitch, down 6% at abercrombie kids, and down 11% at Hollister. Comparable sales exclude Gilly Hicks.
After overseeing the execution/rollout of the majority of the all-new initiatives in 2014 for the future of Abercrombie & Fitch Co., Michael “Mike” Jeffries – the individual responsible for having repositioned the Company at the turn of the millennium into a youthful fashion retailer, establishing its world-renown, iconic modern image, and having overseen its impactful global growth during his 1992-2014 tenure – exited the Company during the fourth quarter on December 8; it was the final blow ushering in a new era as the Company struggles against headwinds to reaffirm its stance in the industry and now. Arthur Martinez, Executive Chairman on the A&F Board of Directors and head of the Office of the Chairman (comprising also of Christos Angelides, brand president of Abercrombie & Fitch and abercrombie; Fran Horowitz, brand president of Hollister; and Jonathan Ramsden, Chief Executive Officer; and together overseeing the Company until a new CEO takes the helm), presided as the lead senior role during the earnings disclosure which became the first without Mike:
“2014 was a year of significant change for Abercrombie & Fitch. I believe these changes put us on the right path to improve profitability and deliver value to shareholders. Our sales for the fourth quarter were somewhat below expectations, but a slightly better gross margin rate and strong expense management enabled us to deliver EPS within our guidance range. For the full year, our results came in well below our initial expectations, as an expected improvement in comparable sales did not materialize, and further progress on expense reduction was insufficient to offset weaker sales. First, we need to improve comparable sales trends in both our U.S. and international stores driven by an evolved assortment and an increased focus on the customer experience. Second, we will make further strategic investments in our successful DTC and omni-channel business. Third, we will continue to seek ways to reduce expenses and be more efficient. Finally, we will selectively expand our international footprint in high growth markets. We expect the first half of 2015 to remain challenging, with declines in our logo business in 2014 persisting in the early part of 2015, but at reduced rates, as well as significant currency pressure. However, we believe that the benefits of all of the changes we have made will be reflected in improved performance in the second half of the year.” – Arthur Martinez, A&F Executive Chairman and Head of the Office of the Chairman
Capital expenditure is expected to round off at around US$150 million for the 2015 fiscal year. Joanne Crevoiserat explained that with capital expenditure “our philosophy remains to be highly disciplined in allocating capital to where it will derive the greatest return on a risk-adjusted basis. We're targeting capital expenditures of around $150 million for the year which are prioritized towards new stores and store updates as well as DTC and IT investments to support our growth initiatives.”
In regards to its storefront operations during FY2015, Abercrombie & Fitch Co. plans on opening 15 full-price stores collectively to occur in China, the Middle East, Japan and 4 in North America: these openings are a focus on furthering retail infrastructure in greater China (which is developing as the international market with the highest concentration of A&F Co. stores); a result of continuously robust operations in Japan (really, with Hollister); the successful introduction and rollout of key, premium units in the Middle East; and arrival of Abercrombie & Fitch and Hollister in Mexico via the franchise agreement with Grupo Axo. Furthermore, the strategic further development of the outlet stores chain has been successful according to intent, and 11 new outlet stores will be opened in the United States. Closings will still carry on forth as ever this decade, and it is expected that around 60 storefronts will shutter throughout the fiscal year through nature lease expirations of stores superfluous and underperforming. Of these and among the first to go in the year has been A&F The Grove in Los Angeles – what was the second A&F Flagship store to have opened in the modern era and under Mike Jeffries – which closed on February 21. Since Q4, the Company has also made the fateful decision to put in place preparations for physical exit of Australia by the end of FY2015 on account of the disappointing performance of its stores (HCo Bondi Junction in Sydney and HCo Doncaster in Melbourne): this will represent a first for the Company, retreating from a country altogether. Apart from A&F Singapore (opened in December 2011), the entrance into Australia, with the Hollister brand, brought a greater opportunity to figure out operating in the Southern Hemisphere, and it remains to be seen if this will affect plans for going into Brazil (although that venture will be done with a franchise partner with direct awareness and experience of that market). Operations in Australia were also a chance to seed influence in that micro regional market (Oceania) for what could have been further prospects in the future (further retail expansion and bringing in A&F and Kids eventually more father on), but the initial investment didn’t strengthen a firm encouraging stance in the market and didn’t gain ground. Any future interest to return and even expand in Oceania will require reconsidering of relevant method and opportunity. Throughout FY2015, a furthermore count of 50 locations in the United States will be converted to the new HCo storefront as well as 20 more in Europe.
Meanwhile, in respects to merchandising, Christos (presiding over A&F and Kids) and Fran (Hollister) seem very promisingly enthusiastic over the ongoing development work – that which is going on at Home Office under their leadership since coming on campus in October 2014 and getting the ball going – to rollout and get to making a full-on distinguishable impact in offerings beginning Back-to-School/Fall 2015: “[...][P]roducts that hopefully take your breath away”, commented the A&F brand president. Now that we’ve finally gotten a few words out of him to make out how he is and will be going on about things, Christos particularly comes across as very A&F-heritage-mindful (while in pursuit of keeping it to-the-moment) and very open-minded with sights set on maximizing positive results and learning and capitalizing from mistakes which he openly admitted he must have already done and will (as it’s just a natural byproduct of any work). By his way of expressing himself just from the bit in the earnings conference, he also comes across as very markedly articulate. Fran shares sharp mind and energy and streak for feeling the great potential to yet bring into realization within their respective brands, and they definitely have rekindled hope – if you’re among those who’ve felt faltered in spirits as of late – for what’s to come in this new stage in the Company.
Furthermore, one of the distribution centers (which are strictly based on-site Home Office in New Albany, Ohio) is nearing finalization of its transition into being one dedicated wholly to DTC – a second DC was opened in the late-2000s back when RUEHL was operating and Gilly Hicks had launched (clearly then expecting both brands to eventually grow as great company contributors) and when Company storefronts were at their highest count. Now with both RUEHL (since 2010) and Gilly Hicks retail operations gone, the sizable drop in store count, and the continuous evolution and growth of ecommerce operations, the move to make one fully DTC-based has been only fitting and practical.
As for other miscellaneous details, the Company’s private jet – what was used for Mike’s travels checking up operations around the world – has been placed for sale; the transition to a branded organizational model is now deemed complete; the Company is putting in place for the first time a form of tying incentives to the performance of management members’ stores; plans are for retraining sales associates as a part of bettering customer experience and service instore (friendlier and more convenient and practical on to every little detail of presentation from should a clothing article should hang, or should be folded, to fitting rooms locked or not); the online store for Gilly Hicks has been taken down as of March (with gillyhicks.com now henceforth redirecting to the “intimates & sleepwear” section at hollisterco.com); as of this time, ship-from-store service is in 375 stores in the United States and order-in-store is in 650 and both will continue to expand in the chain; DTC expanded across Asia throughout FY2014 and, for example (and as further mark of the strides and potential in the market), Hollister’s is up 250% in China; the pricing re-ticketing – marking international merchandise to a lower level approaching U.S. prices (something which was begun in test with Hollister in the U.K. in Q4 FY2014) – will continue on with Hollister throughout the year, spreading around the world, and will be noticeably set by Back-to-School/Fall 2015; and in regards to marketing, a decision to reinvest more in will be decided as the year progresses.
Martinez made a remark which echoed during the conference call, “[W]e're continuing to reduce expenses and making productivity a way of life for this company.” The thing on everyone’s mind, Hopefully with no regrettable compromises.
With the initiatives for the future having rolled out as the transformative fiscal 2014 unfurled, FY2015 is the beginning of make-or-break...