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Analysis: A&F on the right track; Hollister star of the show

While some of the topline numbers from Abercrombie & Fitch look soft, we remain generally impressed with the continued positive performance, even against a more challenging backdrop. That challenge came in two forms: a very tough set of prior year numbers, when total sales rose by 10.6% and comparables by 5%; and, a much more subdued economic backdrop which saw a moderation in overall consumer demand for clothing. That A&F has remained firmly on track, is largely a sign that the underlying strategy is sound.

The more modest gains in overall sales is partly a function of the ongoing store closure program. In our view, this selective pruning of the fleet is a necessary measure which, over the medium term, will help improve profitability and allow A&F to focus its investments on stores and channels which can truly deliver. The company’s willingness to sacrifice even high-profile stores, if they do not generate profitable benefits in sales or in terms of driving online revenue, is prudent. Alongside the closure of underperforming stores, the right-sizing, reconfiguration, and investment in existing stores is also paying dividends. In our view, A&F has a firm grip on creating a chain that is suited and configured to the needs of modern consumers.

At brand level, we are pleased to see Abercrombie return to positive comparable sales territory after last period’s decline. Although a few product missteps were responsible for last quarter’s weaker performance, the fact that Abercrombie has been able to quickly pivot away from them and to clear down inventory, is a testament to the resilience and flexibility the company has now built into its supply chain. We remain broadly impressed by the product innovation and believe that the range is much stronger than a few years ago with a better mix of classics and more fashion-forward pieces. However, if Abercrombie wants to keep customers coming back for more, it is critical that even staple pieces are given a fresh take via different cuts, small embellishments or other differentiating features.

Hollister remains the star of the show with its good run of performance continuing via a 2% uplift in comparable sales. Here, performance is largely down to a fully integrated approach which seen improvements to stores, product, marketing and loyalty schemes all helping to create an immersive and connected customer experience. We believe that there is a lot more runway that will allow Hollister to grow over the next few quarters, especially as product investment and innovation continues.

Across all brands, investment in digital has been a core strategy for growth. Customers at Abercrombie and especially at Hollister are digitally active, particularly on mobile devices. This affords A&F an opportunity both to connect and engage online and convert traffic into sales momentum, and there is evidence that traction is growing. The strong growth in online orders picked up in stores is very welcome, especially as it helps protect margins and generates incremental sales.

International remains a latent area of opportunity for A&F and we are pleased that the company has pivoted away from the strategy of operating expensive, high-profile flagship stores, to a more regionally sensitive operation focused on everyday outlets in good malls and shopping centers. That said, we believe a lot more work is needed to truly regionalize offers and to build a more solid international brand presence.

Overall, A&F is on the right track. Management has a sound plan and is delivering against it. In a turbulent apparel market, A&F is a stable company with good prospects.
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