Shares in Abercrombie & Fitch closed almost 8% higher on Thursday after the fashion apparel house released some strong numbers for the three months to May 1. Digital drove more than half of sales while operating income was the best since 2008.
The core brands—Hollister (including Gilly Hicks) and Abercrombie (plus Abercrombie & Fitch and Abercrombie Kids)—grew by more than 60% each, pushing total company sales in the quarter to $781 million, up 61% on the same period last year. More importantly, the sales were also up 6% on Q1 2019, pre-Covid—and even higher at 18% in the company’s largest market of the U.S.
A&F also turned an operating loss of more than $200 million in Q1 2020 into a profit of $57.4 million, helped by stronger margins. In a call to analysts, CEO Fran Horowitz said: “We have made great progress in transitioning our customers from a wait-for-sale mentality to a buy-it-when-you-see-it one. We are firing on all cylinders and experienced our best Q1 gross margin in over a decade in A&F women’s, Hollister girls and kids, boys and girls.”
Abercrombie & Fitch managed this despite a reduction of 1.3 million gross square feet of global store space, or 20%, compared to the first quarter of 2019. Over the past year, the store count was cut by just four units (net), with Hollister currently at 499 and Abercrombie at 232.
The company is moving away from larger format locations to smaller ones that have omnichannel capabilities. In London, for example, the Abercrombie flagship on Saville Row was closed last year in favor of a significantly smaller unit on Regent Street. “This location has better economics and is our updated prototype. We can’t wait for customers to see it in August,” Horowitz told analysts.
Going digitally native with Gen Z
Possibly an even bigger driver of today’s share surge is the excitement surrounding Hollister’s new teen brand Social Tourist, which had its official launch on May 20. It is expected to be a sales driver for the rest of the year.
Fronted by social media personalities and sisters Dixie and Charli D’Amelio—who have almost 170 million followers between them on TikTok—the brand connects Gen Z digital native lifestyles with thought-through apparel lines. They fall into four categories: gender inclusive; trend pieces such as dresses and skirts; everyday essentials; and swim.
Each collection includes limited-edition items, with new product drops happening every month. Charli D’Amelio commented: “The first drop is all about introducing the brand to our fans, and the second, in June, reflects our personalities: designs that reflect Dixie are a bit edgier, with dark color palettes, whereas my vibe is shown through super-feminine and cute styles.”
The sisters’ father, Marc D’Amelio, has over 30 years of experience in sales and design and serves as a consultant for Social Tourist, lending some extra credibility to the brand.
Horowitz commented: “The power of social selling is a key theme for us and one that we are actively leaning into. It’s helping us identify those new trends that are happening faster than ever, especially with the ubiquity of platforms like TikTok. It’s also allowing us to stay super close to, and communicate with, our customers in real time. As they continue to shift to digital shopping and exploration across social channels, it made sense to introduce a brand inspired by that world.”
The general move to digital at A&F is not new. Since 2017, when digital penetration stood at 28%, investment of more than $150 million has gone into digital and omnichannel capabilities. The result in the first quarter was a 45% increase in digital sales to $403 million (and 81% up on Q1 2019).
The global business model and store expansions are now firmly digitally-led because aligning square footage with digital penetration is regarded as the path to long-term operating margin improvements. A&F CFO Scott Lipesky said: “Our customer has a digital-first mindset. So everything starts on digital and sometimes it ends in the stores and sometimes it ends online.”
This year the company has about 250 leases up for renewal and it says it expects to have some “thoughtful conversations” with landlord partners to find stores that are the right size, right location and the right economic fit.