Victoria’s Secret has exited the swimwear category, and Abercrombie & Fitch Co. is more than happy to take over the market void.
Abercrombie & Fitch ANF, -0.71% calls swim an “emerging category,” along with its intimates/casual lifestyle brand Gilly Hicks, which relaunched at the beginning of 2017.
L Brands Inc.’s LB, -0.66% Victoria’s Secret brand discontinued its swim and apparel businesses, and has seen same-store sales suffer ever since, with some analysts wondering aloud whether the company misjudged the damage this move would have.
Abercrombie & Fitch’s Chief Executive Fran Horowitz said both the swim and intimates category experienced “aggressive growth” on the girls side during the quarter, one more piece of evidence that the company’s strategy for getting on the path to greater growth is working.
Håkon Helgesen, analyst at GlobalData Retail, agrees that these categories are assets for Abercrombie & Fitch.
“There are several reasons for the growth, which on the product front, include a strong denim collection, the outperformance of newer categories like intimates, and plenty of innovation in swimwear lines,” Helgesen wrote in a note. “On the latter two points, it is clear that Hollister is gaining some share from Victoria’s Secret.”
Abercrombie & Fitch is one of a slew of retailers whose shares have jumped in Thursday trading after earnings beat mostly lowered expectations. ANF shares closed Thursday up 17.4%.
Abercrombie & Fitch reported an adjusted 16-cents-per-share loss for the second quarter, ahead of the FactSet consensus for a 33-cents-per-share loss. Sales totaled $779.3 million, down from $783.2 million, but beating the $759.0 million FactSet consensus. The company’s same-store sales fell 1%, with the Hollister brand’s same-store sales rising 5% and the Abercrombie & Fitch brand reporting a 7% same-store sales decline.
“Behind the headline figures, it is clear that A&F is a company of two halves: Hollister is recovering nicely and is gaining ground, while Abercrombie is showing some signs of life but is still struggling overall,” said Helgesen.
Horowitz said the company is “pleased” with the result, and is using the Hollister playbook to inform the changes at the namesake chain. Among the strategies implemented, the company has narrowed its merchandise focus, and Abercrombie & Fitch has a new store prototype that includes elements like brighter lighting and an improved fitting room experience that boosts customer service. The company’s loyalty programs are also reaping rewards, she told MarketWatch.
Even as the company celebrates its progress, Abercrombie & Fitch is facing a competitive and crowded marketplace. For example, the “emerging” jeans category is facing off with American Eagle Outfitters Inc. AEO, -1.68%
On American Eagle’s Wednesday earnings call, Chief Executive Jay Schottenstein said that “by leveraging our strength, such as our signature jeans, we see [a] top opportunity not only in North America, but globally,” according to a FactSet transcript.
And the Aerie brand, which also sells intimates, including the popular bralette, is “emerging as one of the most exciting new concepts,” with Schottenstein saying the company anticipates “realizing Aerie as a billion-dollar brand over the next few years.”
American Eagle Outfitters is “the number two denim retailer in America” across all demographics, said the Charles Kessler, global brand president, on its call.
“Our goal is for the AE brand to be synonymous with jeans and to be the number one jeans brand,” Kessler said.
Cowen & Company analysts led by Oliver Chen say they’re “impressed” with the jeans performance at American Eagle quarter after quarter.
“The company remains focused on working towards its goal of becoming the number one denim destination by focusing on offering customers the best denim fit, assortment and value,” Cowen wrote in a note reiterating its outperform stock rating. Its price target is $14.
RBC Capital Markets analysts believe American Eagle also has good prospects for the back-to-school season.
“Bottom line, considering Aerie’s momentum, women’s opportunity, men’s tops green shoots, and digital strength, we see American Eagle Outfitter’s flat-to-low-single-digit [same-store sales] guidance as conservative,” analysts led by Brian Tunick wrote.
American Eagle shares closed Wednesday up 7.8%, and up 1% on Thursday. The stock is down 19.6% for the year so far.
Abercrombie & Fitch shares are down 6.3% for 2017 so far. The S&P 500 index SPX, -0.09% is up 9% for the period.