ON MAY 28, Abercrombie & Fitch Co. released its earnings results for the first quarter (Q1) - of this 2015 fiscal year (FY2014) representing the first ever in the modern era post-Michael "Mike" S. Jeffries - which ended on May 2. We take a concise look at the results with elaborative perspective...
Revenue (net sales) for Abercrombie & Fitch Co. figured in at US$709.4 million (down 14% from same period last year) for fiscal 2015. This represents the third year-to-year decline in net sales for the first quarter from the peak of US$921.2 million of Q1 FY2012. Furthermore, it stands as the greatest year-to-year drop in net sales in performance in the same period of the fiscal year: Q1 FY2013, down 9% from Q1 FY2012; Q1 FY2014, down 2% from Q1 FY2013, and now FY2015, down 14% from Q1 FY2014. Until Q1 FY2015, revenue for the first quarter period had not resulted in performance under the US$800 million mark since the jump from Q1 FY2010's US$688 million to Q1 FY2011's US$837 million before reaching the Q1 FY2012 peak.
Breaking figures down, net sales were US$448.9 million in the United States (down 11%) and US$260.5 million internationally (down 18%). By brand, performance is now recognized under two main divisions which now make up the Company - Abercrombie (Abercrombie & Fitch and abercrombie kids merged as one, led by Brand President Christos Emilios Angelides) and Hollister (led by Brand President Fran Horowitz-Bonadies). With that clarified, performance by division stands at U$340 million through A&F/Kids (down 12% from Q1 FY2014) and US$369 million (down 12%) through Hollister Co.
Total comparable sales – measuring established business which operated in the full year; excluding new openings – for the Company were down 8% (including stores/DTC). Regionally, total comparable sales were down 7% in the United States and down 9% internationally. By division, total comparable sales were down 9% A&F/Kids and down 6% at Hollister:
"On a sequential basis, Abercrombie comp sales declined slightly in both the U.S. and international markets. However, Hollister comp sales improved sequentially in both the U.S. and international markets, which included positive comp sales in Asia and broad based sequential improvement in Europe, including in the UK By category, continued weakness in the tops business driven by reduced logo levels offset continued strength in jeans and dresses during the quarter. As I mentioned, the reduced logo business continue to weigh heavily on our results, contributing approximately 7 percentage points to our down 8 percentage points comp for the quarter, in line with our expectations coming into the quarter." - Joanne C. Crevoiserat, A&F Co. Chief Financial Officer
Overall, the decline in revenue was "driven by a comparable sales decline of 8% and an adverse effect from changes in foreign currency exchange rates of 6%.
Q1 FYY2014 experienced a decrease in the percentage of gross profit from total net sales, 58% (US$411.549 million), which factored in after a rise cost of goods which made up 42% (US$297.873 million) of total net sales. This is comparable to FY2014's percentage of gross profit from total net sales – 62.2% (US$511.659 million) – with cost of goods having been at 37.8% (US$310.769 million). "Gross profit included $26.9 million of charges in the first quarter related to a write-down of the carrying value of inventory to net realizable value, primarily in the U.S., as the Company elected to accelerate the disposition of certain aged merchandise that does not reflect the Company's prospective brand positioning. The Company expects to incur additional disposition-related charges of approximately $2 million in the second quarter in connection with this election."
With total operating expenses at US$501.746 million (including US$391.638 million in stores and distribution expense; US$107.533 million in marketing, general and administrative expense; and US$6,133 million in asset impairment) offset by US$1.598 million in restructuring benefits charges and US$1.960 million in other operating income, net, operating income came in at a loss of US$90.197 million.
Conclusively, factoring interest expense of US$4.639 million brought a total loss of US$94.836 million. This was offset by a tax benefit of US$31.590 million to bring final net income for Q1 FY2015 at a loss of US$63.246 million (GAAP) for Abercrombie & Fitch Co., this comparable to Q1 FY2014's net income at a negative US$23.641 million (GAAP).
"We knew it was going to be a tough quarter for a lot of reasons, some environmental, notably foreign exchange, and some specific to our company, and most significantly, because many of the actions we are taking to improve our business are in the early stages of implementation, and so our numbers don't reflect the many initiatives underway to reinvigorate our iconic brands. But we do see traction in several areas. Comp sales performance on a sequential basis has shown improvement in a number areas of our business, particularly within Hollister. The new more inviting storefront for Hollister continues to do very well, with converted stores still experiencing a high single digit increase in sales and gross margin. We saw a sequential improvement in Europe in key markets such as the U. K and France and are also delivering great results in China. And all of this has been accomplished against the backdrop of significant headwinds for our industry, most notably foreign currency translation. Our comparable sales trend has continued to improve in May, increasing our confidence that we will see continued sequential improvement into the second quarter and the back half of the year. Our turnaround won't be accomplished overnight, but we are expecting that the changes will help us stabilize our business this year and lead to meaningful and lasting improvement moving forward." - Arthur C. Martinez, A&F Co. Executive Chairman and head of the sans-CEO-interim/temporary Office of the Chairman
"As Arthur said, while the first quarter was difficult, and the results are not acceptable, we do not believe they reflect the potential of our brands going forward as we continue to make significant changes across all areas of our business. And I'm grateful to all of our associates across the company for their work to effect that change." - Jonathan E. Ramsden, A&F Co. Chief Operating Officer (COO)
In regards to store operations, the Company ended the first quarter with 962 stores (789 in the United States and 170 internationally), and it still anticipates its new openings count, by the end of the 2015 fiscal year, to comprise of five full-price stores in North America and seventeen elsewhere internationally with a focus on China, Japan, and the Middle East. While the rollout of new facades for the Hollister and Abercrombie & Fitch stores have been ongoing for a year now, the Company has now been in development of new interior layout prototypes for both brands. With Hollister, a store featuring the out-and-in all-new future store format was opened at Polaris Mall in Columbus, Ohio, and four more Hollisters in the all-new format will open in the year: "The new prototype allows for more space and flexibility between genders and with increased visibility, brighter color themes and better layout, customers will have an easier shopping experience. We are pleased by the initial customer reaction and will be converting four additional stores over the coming weeks," commented Fran. There has already, meanwhile, been movement in the Hollister division to remove props and fixtures which will not continue to take part in this new vision refered to as the "modern Hollister" coming into being. And as preparations take hold to begin rolling out Hollister's new interior format, the implementation of the all-new facade will continue worldwide. While physical and visual changes to the overall stores has been more strong with Hollister so far, changes to the Abercrombie & Fitch chain are also taking place: along with Hollister, there is a focus on improving customer flow and presentation by removing and adjusting props and fixtures and allowing a better showcase of product more practically including being more better able to show-off new silhouettes, details, colors, and fabrics and more facilitating the customer's ability to appreciate product; elements of ambiance such as scent, music, lighting continue to be readjusted; and, following the development of a redesigned facade, a new prototype is underway for a new instore layout - the first Abercrombie & Fitch store to fully feature the all-new prototype will be opened in the fall of 2015. "[...] [A]nother important dimension of our U.S. real estate strategy which is the testing of new store prototypes and sizes. Our ability to prove out a fresh and compelling new store format at a reasonable capital cost, while significantly increasing both productive square footage and unit density has the potential to be a significant value driver," shared Jonathan E. Ramsden, A&F Co. Chief Operating Officer. Before the first new-prototype one expected in the fall, a full-price Abercrombie & Fitch will be opening in June, A&F Westfield Southgate in Sarasota, Florida, Apart from plans for full-price stores, the Company anticipates opening nine outlet stores in the United States in following with further developing that aspect of the chain; outlet stores have been performing with positive comps for the third consecutive quarter. As for the rest of North America, full-price store openings include A&F Pacific Centre in Vancouver, Canada, and initial stores in Mexico; another outlet store will also open on the Canadian West Coast. Internationally, China, Japan and Middle East operations have been making positive initial margins and the FY2015 openings by the end of the year will include about four Abercrombie & Fitch mall-based stores in China, one in Japan, and three in the Middle East (one of which has already happened in Kuwait, the second A&F there); and five Hollisters in China, two in Japan, and two in the Middle East - seventeen, indeed, in total. When it comes to closures, the Company anticipates the eliminating 60 storefronts, through natural lease expirations, by the end of FY2015: "Excluding the RUEHL and Gilly Hicks brand closures, we have closed over 275 domestic stores in the past few years and have significant flexibility over the next couple of years," added Ramsden. Closing of the Company's presence in Australia - HCo Bondi Junction in Sydney and HCo Doncaster in Melbourne - is still set to be done by the end of the year. When it comes to the associates involved, management has been given greater autonomy in running their stores and, bringing a raise in a balancing accountability, an incentives program has been put in-place. "We are creating greater ownership and accountability within our store management team through new incentives and training programs," stated Fran. And Christos elaborated, "We've implemented programs to help store managers take on a more customer-centric, business-driven approach through our previously announced store incentive programs. We've also continued to enhance our store training to ensure that our managers and brand representatives will have the tools necessary to drive their business, manage expense, and improve the overall productivity of their store."
When it comes to product and merchandising, both Brand Presidents are focusing on delivering the assortment with a well-developed differentiation, fine-tuned to the character of each, trend-right, and overall compelling for the respective targeted audiences. Numerous senior level associates were furthermore hired in the first quarter to supplement the teams and work, under the Brand Presidents, in their respective brands in leading such aspects as design, merchandise, planning, and inventory: Christos put in-place three new General Managers for mens, womens, and childrenswear; and Fran shared about the reorganization of the team in charge of product to "enable us to build regional tailored assortments that will be adjusted based on consumer preference" and top-level placements to aid the customer-focused facet. Christos continued to offer more of his intent for Abercrombie & Fitch by saying that his work is in for "reestablishing the vision for the brand with a focus on being the best at design, whether that being our heritage homeland of preppy or military styling, authentic denim or pretty lace or in chasing the latest trends. We've also been improving quality levels in terms of fabrications, washes, embellishments, styling and the fit of our clothes and the sizes we offer. In addition, we've made progress in evolving the buying inventory management processes to ensure that we are offering a well balanced assortment by channel across fashion, classics and also logo. [...] We do have a considerable amount of work ahead of us, but I'm really encouraged by the change that we made and I believe the strategies will be significant in building on the rich heritage of the Abercrombie & Fitch brand." Fran parallels Christos' drive and is expressive in her pursuit of upholding the Hollister brand calibrated to its Southern California spirit, and she added that "we have made significant progress during our last two product review cycles to ensure we have the right process in place to develop, review, and buy our assortments. We have plenty of opportunity to improve our merchandise assortment and I'm confident that we will see incremental improvement with each floor set going forward." Christos specified that, all-the-while, he works "for the customer" and that efforts are also focused on retaining established customers, reengaging customers which have left, and targeting new customers for now and the future. Furthermore, there is work being begun on an "architecture" of price within each brand: we saw the beginnings of this with the introduction of the entry-level product A&F Essentials and Hollister Must-Haves (both of which have been successful though Christos even sharing there's work on quality to get more right), and there is a focus on having a pricing structure worked from entry level and up to a degree appropriate to the aspirational level of each brand (there is strong indication we may see the return of the high-end Ezra Fitch trademark at Abercrombie & Fitch sooner or later). The overall effort is in the creation of a true intelligent, multi-dimensional collection of offerings, fitting at each brand, through pricing, colors, trends, fabrications, etc. We are to begin seeing the significant results of their work for the future beginning with the Back-to-School / Fall 2015 fashion season as it develops on.
As for other miscellaneous developments, order-in-store has been expanded throughout the entire American infrastructure, ship-from-store will have expanded to about 70% in the United States by the end, in August, of the second quarter of this fiscal year, and reserve-online-collect-instore was introduced in the U.S. in Q1; ship-from-store and reserve-online-collect-instore will be introduced in Canada and the United kingdom by the end of the fiscal year, and online returns instore will be made available in the year beginning in the U.K. and later expanding in Europe; prices ticketing adjusted to an appropriately lower level for international merch was introduced in test with the Hollister brand in the U.K. at the end of FY2014, and it was rolled out to remain in the U.K. during the Spring 2015 fashion season, with resulting comp improvements, and will continue to roll out by Back-to-School / Fall 2015 around the rest of the world; with the see-saw of pricing and promotional activity, it will be more moderated as time goes on in simplifying the customer's shopping experience and clarify on quality and value proposition; the partnership with Grupo Axo, for Mexican expansion, presents the first of a fully-fledged franchise agreement which will serve as premium example in pursuit of further international expansion while lowering direct capital investment in part of the Company; wholesale partnership with ASOS has been successful and will expand to the Hollister brand with that company by the second quarter while expanding Abercrombie & Fitch in the third quarter with another second partnership; licensing the fragrance arm with Inter Parfums will begin to test FIERCE cologne in Sephora in France and also in duty-free spots around the world, and the release of new olfaction (scent) creations will commence in 2016; and the corporate jet, which was utilized for domestic and international travel by former Chairman & CEO and founder of the modern fashion retailer Abercrombie & Fitch Co., is still up for sale.
In what was a fitting summary on things on-going, Arthur stated:
"Hopefully all of you now have a much stronger sense of the profound changes that are taking place within our company. It's important to note that our company ran as a singular business model for two decades. That model became less relevant in a changed marketplace, with new customer expectations. There is great potential in front of us and there is a great amount of work being done throughout the organization to realize that potential, and I and the board continue to be confident that the changes taking place will allow us to realize the full value of our brands. We're fortunate to have a team of very, very talented executives, who you've heard from today, leading the charge on these initiatives. A new CEO will be appointed at an appropriate time to continue this work, and the board is deeply engaged in that process."
Stock for Abercrombie & Fitch Co., trading with the ticker symbol ANF - which had hit a more than five-year low (the lowest it has been in the 2010s) after the release of FY2014 earnings results and only having begun a very modest little rise until beginning to fall yet again a month before Q1 FY2015 results were to be announced - went up more than two points on the New York Stock Exchange. Modest though, still, a rise in result of a positive glimmer on things as, despite the continuous negative earnings results, there is considerable newfound strengthening of encouragement as we move forward...
See Abercrombie & Fitch Co. press release for Q1 FY2015 results, including miscellaneous other financial details, (here)!