Abercrombie & Fitch – Cautious, but closer to the upturn

As we discussed in our initial review though (see FAT169 for details), A&F is a well-managed business with a healthy balance sheet and strong brands that will underpin future growth as the recovery gains traction. The company’s current period of weakness boils down to an inevitable outcome from a cyclical downturn,abercrombie and fitch rather than a fundamental change in trend.

In terms of the latest second-quarter result, same store sales fell 30% through the three months to August 1 2009, in comparison to the same period last year. Total store sales contracted by 23%, from $845.8 million to $648.5 million.
The company also suffered considerably from the impact of non-operating costs, with the exit of the Ruehl business incurring $23 million of lease termination fees. This served to hammer abercrombie and fitch’s bottom line earnings to a loss of $26.7 million. Management expects the Ruehl closure to generate total costs of $65 million, with the remaining $42 million hitting the earnings through the second half.

As Members may recall, the decision to launch the high-end Ruehl brand represents a lone blemish on CEO Mike Jefferies otherwise untarnished record. abercrombie and fitch launched Ruehl in 2004, aiming to capture the aspirational New York City lifestyle for females. Perhaps a better name would have been “Sex and the City Accessories”. Either way, the brand failed to gain traction and the GFC subsequently snuffed out any near term chance of success. Management announced the closure of the 29 loss-making stores in June 2009.
In terms of management’s international growth strategy, the opening of the flagship Milan stores is on track for October, and December in Tokyo. The company also has a growing presence in Europe, abercrombie and fitch with seven Hollister mall-based stores in the UK, one in Germany, and another in Rome.