What Abercrombie & Fitch’s Struggles Signal About The State Of Retail

Abercrombie And Fitch shares slumped 25% on Wednesday. — Abercrombie & Fitch shares slumped 25% on Wednesday after its sales outlook disappointed and the company said mall traffic has declined. (Photo by Justin Sullivan/Getty Images)

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Abercrombie & Fitch shares slumped 25% Wednesday after the clothing retailer reported disappointing sales growth and outlook and said it will shut another three flagship stores.

The mega-stores to be shut include Hollister’s four-story location in New York’s Soho, and A&F stores in Milan and Fukuoka, Japan. Those stores, including a Copenhagen flagship that was closed, totaled less than 1% of the company’s $3.6 billion in sales last year. However, in a glaring contrast, store closing-related one-time costs alone would be $45 million this quarter.

The New Albany, Ohio-based company also has shut a flagship in Hong Kong.

“Flagship business is a drag on topline and bottom line,” CFO Scott Lipesky said on a conference call Wednesday, adding about 15 remaining flagships combined also are a burden on results, without detailing any plans for future potential store closings. “Each store has its own story….There’s not a silver bullet.”

Abercrombie’s flagship closings reflect a familiar industry pattern as retailers wake up to a sobering reality: Mega flagships in expensive and high-traffic neighborhoods don’t translate to sales, let alone profit. For instance, Gap, Ralph Lauren and Lord & Taylor have all shut their Fifth Avenue flagships in New York even as better-performing brands including Nike, Vans and discount store Five Below have moved in.

Instead, Abercrombie, like many other retailers, is going small and local and “more intimate” with stores that combine integrated web services such as pick up in store for online orders.

Under CEO Fran Horowitz, the retailer also has removed dark shutters to make its stores brighter and did away with topless male models that once were a highlight at the front of its stores. Its once sexualized marketing campaigns also have shifted to more inclusive messages and wholesome images and have given its teen and young millennial customers more say, another common industry trend.

For instance, Hollister’s current campaign asks its customers to “co-create with us,” while A&F unveiled a campaign for its Fierce men’s fragrance inviting men to be vulnerable.

“Our playbook is working,” Horowitz said on the call. “Our consumers continue to react to newness. Our campaign is resonating with consumers.”

Companywide comparative sales rose for a seventh straight quarter while at Hollister, about 60% of the total business, they rose for a tenth consecutive quarter. Its namesake chain sales turned positive after a decline the previous quarter.

Still, there are wildcards that signal potentially negative ripple effects across the retail sector. Abercrombie’s second quarter sales outlook wasn’t the only disappointment. The company expects its gross margin, or sales left after minus the cost of goods, to narrow. One key culprit: Mall traffic, where most of its stores are, has declined this month, and Abercrombie expects retailers may begin to cut prices to drive sales.

“If inventory starts to pile up, we are going to be competing in that environment” with promotions, Lipesky said.

A stronger dollar also has hurt some foreign tourism spending and translated overseas sales. Comparable sales in the U.S. rose 4% but declined by the same rate internationally, hurt by Brexit and other macroeconomic concerns in both Europe and Asia, Horowitz said. Against the uncertainty over the U.S.-China tariffs war, the retailer is also “proactively reducing” its sourcing dependence on China to below 20% of its product mix this year from 25% last year, she said, adding Abercrombie recently hosted a vendor conference in Vietnam.

“We don’t operate in a bubble,” Horowitz said.

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