Abercrombie & Fitch (NYSE:ANF) has been on an upswing thanks to the sustained momentum of its Abercrombie brand, strategic store optimization initiatives, and a reduction in freight costs. These positive factors have contributed to the company’s second consecutive quarter of surpassing earnings and sales expectations during the second quarter of fiscal 2023. Notably, net sales increased by 16.2% year-over-year and 16% in constant-currency terms.
The company highlighted the success of its efforts to enhance the brand positioning of Hollister. Investments in various aspects of the business, including stores, digital platforms, and technology, as part of its “Always Forward Plan,” have proven to be advantageous.
Let’s take a closer look at the key factors driving ANF’s promising performance:
1. Store Optimization
Abercrombie is actively streamlining its store network by reducing its reliance on underperforming tourist-driven locations. As part of this optimization strategy, the company intends to transform larger flagship locations into smaller, omni-channel-enabled stores. For fiscal 2023, Abercrombie plans to open 35 new stores, remodel 20 combined locations, resize various stores, and close 30 outlets.
2. Comparable Retailers
Other retailers are also expanding their store networks. Ross Stores (NASDAQ:ROST) recently added 43 Ross Dress for Less stores and eight dd’s DISCOUNTS stores in various states, in line with its growth plans for fiscal 2023. Urban Outfitters (NASDAQ:URBN) opened 16 outlets in the first half of fiscal 2024 while simultaneously closing eight locations. Nordstrom (NYSE:JWN) is set to open a Nordstrom Rack store in San Antonio, Texas, as part of its expansion strategy.
3. Margin Improvement
ANF experienced favorable margin trends, largely attributed to cost savings in freight and an increase in the average unit retail (AUR). The company’s gross margin expanded by 460 basis points to reach 62.5% in the second quarter of fiscal 2023. This growth was driven by a 340-basis-point reduction in freight costs and a 400-basis-point positive impact from AUR growth, partially offset by a 180-basis-point impact from rising cotton and raw material costs and a 60-basis-point impact from adverse currency rates.
As a result, the company has raised its operating margin guidance for fiscal 2023 to 8-9%, up from the earlier projection of 5-6%. This increase includes a 250-basis-point year-over-year improvement, driven by lower freight and raw material costs, along with modest leverage on operating expenses, despite challenges related to inflation and increased investments in the “Always Forward Plan.”
4. Sales Outlook
Abercrombie expects net sales to grow by 10% year-over-year for fiscal 2023, a notable increase from the previously mentioned 2-4% growth estimate. The company anticipates that the Abercrombie brand will outperform Hollister. Additionally, the fiscal 2023 guidance includes the impact of a 53rd week, expected to contribute $45 million to sales, which is anticipated to more than offset higher expenses due to inflation and increased investments in the “Always Forward Plan.”
For the third quarter of fiscal 2023, Abercrombie anticipates sales growth in the low-double digits year-over-year, with a 140-basis-point benefit from foreign currency.
5. Long-Term Strategy
The company remains on course with its “Always Forward” plan, which emphasizes brand growth, leveraging omnichannel capabilities, expanding digital reach, and maintaining financial discipline. Abercrombie’s long-term outlook includes the aim of achieving annual revenues of $4.1-$4.3 billion and an annual operating margin rate of 8% or higher by the end of fiscal 2025. In the more extended term, management envisions annual revenues of $5 billion with an annual operating margin rate of 10% or higher.
The company predicts a 6-8% sales compound annual growth rate (CAGR) for the Abercrombie & Fitch and abercrombie kids brands over the next three years, while the Hollister and Gilly Hicks brands are expected to witness a flat-to-2% and 15% sales CAGR.
Notably, Abercrombie & Fitch adults are expected to be the primary growth driver. The company is focused on accelerating its digital transformation with initiatives such as “Knowing Their Customer Better” and “Wowing Them Everywhere.” Increased investments in customer analytics are seen as a positive step to meet and exceed customer demand. Additionally, Abercrombie plans to generate at least $600 million of free cash flow over the next three years to provide strong returns to shareholders and support omnichannel growth across digital and physical stores.
Conclusion
The future looks promising for Abercrombie & Fitch, driven by the strength of its brand, store optimization efforts, and various growth strategies. It’s worth noting that earnings estimates for the current fiscal year have surged by 108.6% to reach $4.36 over the past 60 days.
Featured Image: Unsplash
Author Faith Yakubu 
