Apparel chain shares tumble 26% after hope of a quick turnaround is dashed
By guest authors Kimberly Chin and Khadeeja Safdar from Wall Street Journal
Investors punished Abercrombie & Fitch Co. after the apparel chain reported slower sales gains and gave a weak outlook. Shares fell 26% on May 29.
Executives at the company, which also owns the Hollister surf brand, warned that visits to U.S. malls have been disappointing this spring and the company was anticipating a promotional pricing environment this summer as stores look to move unsold clothes.
“In the U.S., post-Easter traffic trends to the malls have been challenging,” said CEO Fran Horowitz on a conference call with analysts on May 29.
The retailer said comparable-store sales rose 1 % in the latest quarter, hurt by declines in overseas markets and slower gains at Hollister, which in recent years has been the faster-growing brand. Abercrombie projected comparable-store sales would be flat in the second quarter.
Shares of the company, which traded above USD 30 in April, fell 26 % to close at USD 18.39 on May 29.
Several apparel retailers have reported weak results for the spring quarter, despite a strong U.S. economy and high employment. Last week, Kohl’s Corp., J.C. Penney Co. and Nordstrom Inc. all reported declines in comparable-store sales. Analysts have said that higher tariffs on merchandise imported from China and concerns over trade tensions will also weigh on the sector.
Abercrombie executives said they were wary the U.S-.China trade dispute could lead to higher prices for consumers. The company and its suppliers have been shifting production out of China, but Abercrombie imported about 25 % of its merchandise last year from China.
The mall stalwart has been working for the past several years to turn around the performance at its namesake brand, once known for its shirtless male greeters and provocative marketing. The company has been reconfiguring the brand to reflect a more inclusive image and target a slightly older customer, after the previous marketing began alienating shoppers. The efforts had shown some signs of winning back shoppers last year.
Abercrombie’s progress in past quarters reignited too much excitement among investors, according to Simeon Siegel, a retail analyst at Nomura Instinet. “There was a thought that the company was out of the woods,” he said. “When these retailers priced for death show signs of recovery, investors start to put aside structural challenges and price in a recovery before it actually happens.”
Abercrombie said Wednesday it would close three flagship stores, in New York, Milan and Japan. Executives said the oversize locations were a drag on profits and accounted for less than 1% of sales. But costs from the closings will weigh on its second-quarter results.
The closures would bring the total number of flagships shut since 2017 to five. The company still operates 15 other flagship locations and about 860 stores world-wide.
Ms. Horowitz said the company has been opening smaller shops and remodelling stores. “In this age where it seems like every headline references a retail apocalypse, we continue to invest in our global store base,” she said.
For the quarter ended May 4, the New Albany, Ohio, company posted a loss of USD 19.2 million, compared with a loss of USD 42.5 million a year earlier. Revenue was flat at USD 733.9 million.
The company kept unchanged its financial targets for the full year, including a low-single-digit percentage increase in comparable sales.