About half of Abercrombie & Fitch’s 745 U.S. store leases are up for renewal over the next 18 months, presenting an opportunity to shutter stores without leaving too much money on the table, the struggling teen apparel retailer's CFO Joanne Crevoiserat told analysts Friday.
Abercrombie expects to close approximately 50 U.S. stores through natural lease expirations, Crevoiserat said, and in other cases the company may renegotiate rents as an alternative to outright closure. But she also noted that terms of individual leases vary, the “facts and circumstances” of each store vary as well, and in the aggregate Abercrombie’s flagship stores remain profitable, so the company is being judicious about its store-closing plans.
Abercrombie also operates 185 stores across Canada, Europe, Asia and the Middle East, and while its European leases are structured differently, several there are also flexible, Crevoiserat added.
It looks like Abercrombie & Fitch’s long-awaited pivot from its dark, heavily scented stores and the exclusive-for-the-cool-kids marketing will take time to sink in. The company last week reported that same-store sales at its flagship brand fell 6% in the third quarter, and on Friday's conference call with analysts, executive chairman Arthur Martinez said that “flagship and tourist locations continued to be a major headwind” and that traffic in chain stores remained negative. Abercrombie also warned that the holiday quarter could be a disappointment.
Not only have Abercrombie's changes been slow in coming, but worse, they appear to be going largely unnoticed by shoppers. Neil Saunders, CEO of retail research agency and consulting firm Conlumino, said the initial promise of the rebranding efforts has disappeared and that the turnaround is now “firmly off track.” He noted in an email to Retail Dive that the changes to the quality and design of Abercrombie’s apparel lines are genuine improvements, but that its new marketing campaign is confusing.
The prospect of losing stores is a tricky one for retailers because physical locations have a profound impact on online sales, according to a report from Moody’s released in September. Closing a physical location reduces a retailer’s presence in the market area, and online sales often decline in the zip codes surrounding a shuttered store. “[W]ell-run brick-and-mortar retailers will not only survive online, but can and already are thriving there thanks to leveraging their considerable physical assets,” Moody’s lead retail analyst Charlie O’Shea said at the time.
Crevoiserat told analysts Friday that Abercrombie is taking steps to improve store performance as well as considering renegotiating leases or closing stores. “While flagship stores play an important role as a gateway to the brand and remain profitable in the aggregate, we're taking actions to address and improve their performance,” she said. “In January, we will close the A&F flagship store in Korea, and earlier this year, we successfully negotiated a meaningful reduction in the rent at our A&F flagship store in Tokyo.”
“Abercrombie continues to face significant challenges in repositioning its namesake brand in a more challenging apparel retail environment,” Moody’s analyst Mike Zuccaro said in a statement emailed to Retail Dive. “However, it continues to maintain a conservative financial policy, with moderate debt and leverage levels and very good liquidity. Balance sheet cash continues to amply exceed funded debt levels. We expect this to remain the case as the company further implements its turnaround strategy.”