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Analysis: Abercrombie recovery program remains on track

On the surface, this looks to be a rather disappointing set of results from Abercrombie & Fitch. Sales growth has slowed down both overall and on a comparable basis, and total sales at the Abercrombie brand have slipped into negative territory. However, there are a few mitigating reasons behind the softer performance. Foremost among them is the fact that Abercrombie & Fitch is now lapping some tougher prior year comparatives, which represented the start of its recovery period. A calendar shift and currency fluctuations also took their toll.

Despite these negative headwinds, the company has still delivered positive comparables both overall and for each of the Hollister and Abercrombie brands. And at 6%, U.S. comparables are still on fairly solid ground. On the bottom line, the numbers look good with net income up by 133% over the prior year, supported by a 75% increase in operating profit. When taken in concert, we believe these results are reasonable and show that the company's recovery program remains on track.

Our confidence in management's plans is supported by our consumer tracking data which continues to show a number of positive movements in consumer sentiment about both of the main brands. Over the past year, there has been a 4 percentage point increase in the number of American shoppers who say they consider Abercrombie when shopping for apparel. For Hollister, the same metric rose by just shy of 6 percentage points. The same research also reveals that among core shoppers, perceptions of quality and design at both Abercrombie and Hollister are up sharply on last year.

The results justify the step changes that have been made to things like fabrication, detailing and styling of the product set. In our view, the range - especially at Abercrombie - is now more sophisticated, is more on-trend, and better reflects what modern consumers want. There is also a cohesiveness to the assortment which stimulates multiple purchases and helps to push up average transaction values. As good as these things are, we still believe that both brands have more to do in making consumers aware of the changes and getting them to take a fresh look at the brands.

Notably, many of the positive movements are far more pronounced in the U.S. than they are elsewhere. In our view, the geographical difference in the pace of recovery is telling. While it is right that the company has focused its recovery efforts on its most important market, we believe there is now a need to adapt some of the strategies and plays so that they are relevant to overseas.

Customer dynamics, competitive sets, and perception of the brands are all very different in markets like the U.K. and a degree of localization is needed to ensure that the brands fully resonate with regional consumers. We believe that management recognizes this and has already taken some steps, such as opening a new-format mall-based store in the U.K. at Manchester’s Intu Trafford Centre.

Overall, the recovery at Abercrombie & Fitch is still a work in progress. However, turning around a once very troubled brand is far from easy. Progress and advancement do not all come at once; this is a step-by-step process that will build over time. We are satisfied that management is on the right road to recovery.
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