A tip of the varsity baseball cap to Abercrombie & Fitch CEO Fran “Fix It” Horowitz.
With legacy retailers such as J.C. Penney, Sears and Limited Brands having one foot in the grave thanks to Amazon’s dominance, the 126-year-old Abercrombie & Fitch (ANF) rides into this year’s holiday season with momentum almost reminiscent of the chain’s heydays in the early 2000s. Hollister, a California apparel brand and standalone division of ANF that Horowitz turned around as president when she joined in 2014, has served up seven straight quarters of same-store sales growth. That’s no small feat with longtime rival American Eagle Outfitters at the top of its game and mall traffic continuing to be under severe pressure.
The Abercrombie & Fitch division, with 330 stores globally, has started to shed its problem-child status incurred after years of featuring dimly lit stores with half-naked models standing out front. It delivered its third straight same-store sales gain in the second quarter. The company reports Q3 earnings in mid-November.
Not too shabby.
“I have spent my entire career fixing things and that’s how I feel like I have made my name — it dates back to Bloomingdale’s when I first was able to relaunch a key product line,” Horowitz told Yahoo Finance.
Horowitz’s knack for fixing things has paid off for investors. Since Horowitz assumed the CEO position on Feb. 2, 2017, Abercrombie & Fitch’s stock has surged 69% vs. 25% for the S&P 500 Index. It’s among the top three best-performing specialty apparel stocks this year, up about 16%. American Eagle Outfitters and Express have notched 29% and 16% gains, respectively, while Limited Brands has plunged 49% on the back of troubles at Victoria’s Secret. Urban Outfitters has tacked on a respectable 14%.
“They [Abercrombie] have dialed back on that blatant sexuality that in the current climate is not nearly as appealing as it was,” said Michael Solomon, a professor of marketing at Saint Joseph’s University’s Haub School of Business. “Abercrombie is getting back to its roots and focusing on the product versus racy imaging and long term, this change is probably a good thing.”
What needs to be fixed next
Wander into an Abercrombie & Fitch or Hollister store right now and it should become clear this isn’t the same teen clothier that spawned a 5% same-store sales drop in 2016. Gone are the 19-year-old shirtless male models, in are trendy fall 2018 staples like ripped denim and camo windbreakers. Meanwhile, Hollister, with 540 stores globally, is capturing California cool again instead of just mirroring big brother Abercrombie’s products at cheaper prices.
Amid the changes, product quality has remained intact, said Horowitz. In fact, she’s betting on consumers appreciating quality clothes once again after years of buying cheap disposable fashion at chains like H&M, Zara and Forever 21.
“We went back to supporting the heritage of the company and giving value to the consumer,” Horowitz said.
“Older teens haven’t looked at Abercrombie for a long time; it’s still seen as a high school brand,” Bill Friend, VP of Fluent Commerce, a retail management company focused on digital shopping services, said. While Friend’s two daughters haven’t been lured back into Abercrombie yet, he thinks the chain’s focus on quality will pay off over time.
“My kids appreciate paying a little bit more for quality,” Friend said.
Customers are still fickle
Even with the wins, Horowitz’s fix-it power hasn’t fully convinced Wall Street. In the minds of some, Abercrombie still has work to do to win back a notoriously fickle consumer base. That much is evident in the stock market’s harsh reaction the company’s second-quarter earnings in August. Shares tanked about 17% on Aug. 30 despite Abercrombie’s 10-cents-a-share earnings beat.
Meanwhile, short interest in Abercrombie & Fitch increased to 23.3% of shares outstanding as of Sept. 14 from 21.1% two weeks earlier, according to New York Stock Exchange data. A&F’s short interest has ranged from a low of 17.5% to a high of 30.7% the past two years, Bloomberg data shows.
Rising short interest suggests Wall Street is betting on a stumble in Abercrombie’s comeback attempt.
“After cutting about $350 million in expenses over the last three to four years, we believe Abercrombie’s earnings power going forward is increasingly dependent on the company’s ability to drive positive comparable-store sales, which appears increasingly too difficult in the worsening retail backdrop,” J.P. Morgan analyst Matthew Boss wrote in a note. The longtime retail analyst rates Abercrombie & Fitch shares at underweight — the equivalent of a sell — with a $19 price target. Shares were trading at around $20 midday Tuesday.
But a successful holiday season for Abercrombie & Fitch — a distinct possibility given a solid U.S. economy and momentum at both brands — could go a long way to squashing Wall Street haters. It would also help bring the company closer to hitting some ambitious 2020 financial goals.
At an April investor day this year, Abercrombie & Fitch guided to 2020 targets of low single-digit percentage sales growth and a doubling of EBIT (earnings before interest and taxes) margins. Horowitz says she is “optimistic” on the holidays and is looking forward to the back half of the year.
“I am excited about the progress we are making, we are just going to stay at it,” Horowitz said.
Watch out, short-sellers.
Brian Sozzi is editor at large at Yahoo Finance. Follow him at @briansozzi.