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Analysis: Abercrombie, Hollister have ‘clear sense’ of direction

On the surface, Abercrombie & Fitch’s total sales decline of 3% looks poor. However, the dip is a function of a calendar shift and a shorter trading period compared to last year; currency fluctuations also took their toll. The comparable sales figure, which strips out these negative influences, provides a more balanced assessment of performance and here we believe A&F continues to deliver good growth. The comparable growth rate of 3% is particularly impressive when set against last year’s stellar 9% uplift.

At brand level, there is now a clear divergence between Abercrombie and Hollister. The former posted a 2% decline in comparables with the latter recording an impressive 6% uplift.

In our view, Hollister is a brand that is strongly connected to its core customer base, both through impressive marketing and an assortment that is attuned to their needs and tastes. Our own tracking shows that the brand has strong traction and is attracting and converting a core group of shoppers on a regular basis at the same time as adding some new shoppers into the mix. Provided Hollister remains on trend with its range – and we see no reason why this should not be the case – we believe it should continue to perform well as the company moves into its new fiscal year.

After a good run, Abercrombie’s performance – which saw comparable sales decline by 2% – was a little soft this time around. Admittedly the brand was up against tougher prior year figures, but nevertheless there has clearly been a loss of momentum. Our data show that affinity to the brand, although much improved, is a more tenuous than Hollister. This means that Abercrombie was more exposed to the loss of consumer momentum in the general economy after Thanksgiving and Black Friday. Nevertheless, the brand continues to show good potential and there were a number of fashion wins over the period, including good traction in outerwear. Despite the slowdown we remain confident that Abercrombie is on the right track and can improve its numbers as it fine-tunes both marketing and merchandising.

On a geographical basis, the US continues to be the driver of growth – with a 5% uplift in comparable sales this quarter. Comparatively, the international numbers, where comparables declined by 2%, are much softer. Although we believe that international markets hold significant future potential for A&F, we remain cautious on the general outlook in some geographies, most notably Europe, where consumer sentiment is deteriorating, and apparel competition remains extremely tough.

Away from the sales numbers, we are pleased with the continued progress on the bottom line. Thanks to a number of initiatives designed to streamline the business, gross profit rates improved by 70 basis points this quarter. At net income level, despite one less week of trading, profit was up by 30.2% largely thanks to a lower income tax expense. Looking ahead, we believe that there are further gains to be made from reducing expenses and, most importantly, we think that management has a very firm grip on operations and will engineer savings where it is prudent to do so.

Overall, we remain satisfied with the progress of the company and its individual brands. Advancement has clearly been made and this is showing up in customer data and the financials. There is obviously a lot more work to be done, especially in the Abercrombie division, but there are clear plans for this and, as such, both brands have a clear sense of direction as they move into the new fiscal year.
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