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Why Abercrombie & Fitch is 110% right to close its massive flagship stores

Brian Sozzi
Editor-at-Large

Abercrombie & Fitch’s latest decision to wave goodbye to hulking shrines to apparel is 110% right.

Although, Mr. Market may need some convincing on that one. Abercrombie & Fitch shares (ANF) declined about 20% on Wednesday as it revealed first quarter same-store sales at its namesake brand and Hollister that were slightly below many Wall Street forecasts. Gross profit margins of 60.5% also came in a shade short of the 60.6% analyst consensus.

The company delivered a net loss of 29 cents a share, better than the 43 cents a share analysts feared.

But it was Abercrombie’s disclosure that it will close three more flagship stores that also likely weighed on investor sentiment.

“Big flagship stores are not the future of the brand,” Abercrombie & Fitch CEO Fran Horowitz tells Yahoo Finance.

Abercrombie & Fitch exits flagships

Abercrombie & Fitch said it will soon exit three flagship locations: a Hollister in New York City; an Abercrombie & Fitch in Fukuoka, Japan; and an Abercrombie & Fitch in Milan, Italy. All of these stores were opened (2009-2010) under the leadership of former controversial Abercrombie CEO Mike Jeffries, who bordered on obsessed with showing off the brand via massive flagship stores... even at the detriment of profits.

The three stores account for 140,000 in total square feet and according to Abercrombie & Fitch, have had below company average productivity.

The apparel retailer previously closed flagship stores in Hong Kong (first quarter 2017 closure) and Denmark (first quarter 2019 closure).

Investors probably read the news as the Abercrombie & Fitch brand will be less out in front of consumers globally. Less visibility, less sales potentially. Or that the brand itself no longer has the cache to keep flagships open, which may eventually hurt stores in malls.

But that cohort is probably missing the point — what attention-span light Snapchat-using teen wants to walk up five floors looking for clothes? Nowadays it’s all about mobile ordering and getting in and out of stores as quickly as possible wearing something cool to take a picture in for an Instagram post.

(AP Photo/Mary Altaffer)

So if you are Abercrombie & Fitch, why not shutter some lagging flagships and redeploy capital to more productive uses. SW Retail Advisors Stacey Widlitz reminded me on Twitter that flagships are often “big money pits.” Abercrombie & Fitch Chief Financial Officer Scott Lipesky tells Yahoo Finance the latest flagship closures should help the bottom line over time.

Horowitz, who has been leading an aggressive shrinking of the company’s store fleet since joining in 2015 in a bid to preserve margins, says her team remains focused on smaller stores that better engage consumers. Horowitz says she continues to be a “big believer” in stores.

The company plans to open more stores than it closes in 2019, mostly smaller locations.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi

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