Similar to Q4 2022 results for the department stores, specialty apparel retailers reported mixed results with those catering to the more affluent and more associated with wear-to-work wear outperforming on sales and profitability. Those catering more to the mass consumer had to deal with very high promotional levels in the market and requiring them to have to work hard to clear excess inventories; happily, the brands discussed here were successful in that endeavor; however, as a category much more progress is required. As a sector, inventory growth is well in excess of sales growth versus the 2019 baseline.
Abercrombie & Fitch
- There are now 180 Abercrombie & Fitch brand stores in the U.S.. Global Q4 2022 comparable-store sales for the brand was up an estimated +14%, lifting the sales productivity to $1,155 per square foot (including physical and digital sales) and to a record $7.5M in sales per comparable store. (Comps were stronger than the traffic shown in Placer because average unit retail (AUR) was higher YoY and coverage differences.)
- For context, roughly three-quarters of the company’s revenue comes from the U.S. and is split roughly 50/50 between A&F and Hollister. The comparable sales figures discussed here are global numbers and the U.S. business is the strongest region; thus, comps in the U.S. are 200-300 bps stronger than what we report here. As such, the A&F U.S. comp was up 16 versus estimated global comparable sales growth of 14%.
- On stores and the next year, CEO Fran Horowitz stated, “We continue to focus on smaller, more productive stores, which is a key enabler of improved 4-wall operating margin. We believe store expansion and marketing execution nicely positions Abercrombie brands for growth -- for the growth expectations in the Always Forward Plan.” (Recall that they are repositioning stores into open-air centers).
- There are now 380 Hollister brand stores in the U.S. and comparable-store sales for the brand were down only 2%, lifting the sales productivity to $551 per square foot (including physical and digital sales). That comparable-store sales trend was sharply better than the prior three quarters’ trend of -10%. The teens category has been soft in recent months given impact of high inflation on this customer. For example, American Eagle’s Q4 2022 comp was down -8% and from the comments from off-price chains, there was a shift to that channel by teens and young adults. Horowitz noted that, “Our teen customer continues to favor the in-store experience with more than two-thirds of Hollister sales happening in store in 2022…You will continue to see the store play an integral role at Hollister as we move forward and combine the assortment evolution, our team will have all the pieces in place to stabilize the brand and return to growth later this year.”
- Gross margins and EBITDA margins strengthened from the broader year’s substantial compressing being down only -60 bps and -150 bps vs. the year’s -540 bps and -700 bps. Inventories came down substantially leading to a substantial improvement in the company’s cash position; inventory turns improved from 2.0X to 3.4X. (Progress, but more to go.)
- Urban Outfitters CEO Rich Hayne commented on the return to physical retail and the channel mix: “Store traffic has definitely picked up and in Q4 2022 was up double-digits. Comps very much positive…traffic is inching closer to pre-pandemic levels. Conversion is still a little softer, but I think that's largely because prices are up a bit and markdowns were down a bit, except for the urban Outfitters North America brand. In total, comparable-store sales in Q4 2022 rose double-digits and as did the AUR. But again, I think it's not necessarily unexpected that as COVID ends and stores rebound, some of the people who shopped online are anxious to go back into the store and then don't shop online. So that gives you a sort of a view overall of how the channels are performing. But in some they're actually, when you look at the comp sales, we're now remarkably similar. We're basically not with all brands, but we're basically the 50-50 digital versus stores.”
- The Anthropologie brand reported +9% growth in comparable-store sales and nearly $2B in sales for the year, which works out to $1,092 per square foot in sales productivity (both physical and digital sales). The comp increase was due to higher traffic and AUR across all three major categories: apparel, accessories, and home. The brand's metrics have been robust all year and we’d expect it to produce a solid 2023.
- President Frank Conforti noted, “The Anthropologie customer remains optimistic and is choosing fashion newness that is versatile across multiple parts of their lifestyle, whether it's going out or returning to the office. The Anthro customer continues to respond favorably to the brand's more dressed up categories like dresses, pants, jackets and shoes with deals… The brand has also started to see complementary growth of more casual and versatile product perform alongside the more occasion product, which has shown no signs of slowing. The home category delivered a positive comp driven by strength in decor, which was slightly offset by a decline in gift and entertaining.” Anthropologie Brand CEO Tricia Smith, “The occasion and kind of return-to-office product that has been driving our sales really isn't showing any signs of slowing down either. there's incremental growth that come from this growth that we're seeing now in the casual segment of our product offer.”
- The Free People brand posted +15% growth in comparable-store sales and $1.1B in sales for the year, which works out to $2,300 per square foot (both physical and digital sales). The comp increase at physical stores (+high single-digits) was driven by higher traffic and AUR. We expect the brand to also produce a solid 2023.
- The Urban Outfitters brand saw a -10% decline in comparable-store sales and $1.5B in sales for the year, which works out to $672 per square foot in sales productivity (both physical and digital sales). Urban Outfitters has suffered throughout the year given economic pressures on its core customer (similarly at Hollister and Gap). Visits to urban stores and the big metro areas are still off a lot (compared to suburban stores).
- Conforti noted, "UO's negative comp was the result of disappointing performance in North America due to double-digit negative store and digital comp sales. As noted previously, we believe the macro environment in North America is having an outsized impact on the Urban Outfitters customer. While we know the macro environment for the urban customer is not ideal, we also know we can execute better. Additionally, we believe the disruption in the supply chain has had an outsized impact on this brand…The good news is that the supply chain speed and reliability has recovered, and the brand is now returning to their previous buy calendars. Since our fashion model is built in part on speed, the improvement in the supply chain will give our merchants the opportunity to make fashion calls closer to consumer demand, allowing more opportunity to chase into well-performing items. As we look at Q1 2023 for the UO brand, we believe the global UO brand could deliver results similar to Q4's results.”
- Company-wide gross margin for the retail segment was relatively stable, cash flow was strong, and inventory turns improved to 5.9X. As the company’s (and industry’s) elevated supply chain costs and dyssynchrony ease in 2023, all KPIs should show improvement, including gross margin (+200 basis points) and turns (back to pre-pandemic levels of 7.0X).
- New openings for the year include 10 larger 2.3K square foot Free People Movement stores, bringing the total to 41, and 25 Free People and Anthoropologie stores.
- The Old Navy brand reported -7% comparable-store sales and nearly $8.2B in sales for the year, which works out to $411 per square foot in sales productivity (both physical and digital sales). “Softness [was experienced] from the lower-income consumer and in the kids and baby category partially offset by strength in the women’s,” said new brand leader Horacio Barbeito. Barbeito continued, “Old Navy has delivered significant improvements in performance relative to the first half of the year. But in order to unleash Old Navy's full potential long term and further amplify its market leadership, we have spent considerable time focusing on stabilizing the core and elevating execution across our entire organization… After losing share in the first half of fiscal 2022, Old Navy maintained share in the second half of the year primarily driven by market share gains in Women's. We are pleased to report that Old Navy's Women's business showed positive momentum in the fourth quarter, which is a significant improvement and very important for the health of our brand. This was offset by weakness in kids and baby as noted by many others in the industry. But the good news is that we renewed assortment in the new kids and baby flow, we're seeing early improvement in sales trend. Third, with our now leaner inventory position and balanced assortment, we have been focused on getting our responsive capabilities back in order to buy more efficiently and remain dynamic and flexible to chase into demand…Some of the green shoots we're seeing in NPS scores in the stores are giving us confidence…that we are in the right direction addressing some fundamentals of the business."
- For Athleta, the brand repored a -5% decline in comparable-store sales and nearly $1.5B in sales for the year, which works out to $1,345 per square foot in sales productivity (both physical and digital sales). The earnings release read, “Mary Beth Laughton, President and CEO of Athleta is exiting the business, effective today. We believe Athleta has incredible potential, but it has suffered from product acceptance challenges over the past several quarters. As we look to capitalize on this potential and remain competitive amidst a dynamic landscape, we believe now is the right time to bring in a new leader who can position Athleta for long-term success,” said Gap Inc. Interim CEO Bob Martin. “Print and color misses are examples of where we are not meeting [our customer’s] expectations fully.”
- The Gap brand reported a -4% decline in comparable-store sales and nearly $3.58B in sales for the year, which works out to $490 per square foot in sales productivity (physical and digital sales). “The shutdown of Yeezy Gap negatively impacted growth in North America by approximately 2 percentage points. Performance was driven by softness in the kids and baby category offset by strength in the women’s.” The company expects to close another 30+ locations in 2023.
- Banana Republic reported -3% decrease in comparable-store sales and nearly $2.1B in sales for the year, which works out to $553 per square foot in sales productivity. The earnings release read, “While dresses and suiting drove comp growth in the quarter, the company remains mindful of the fact that BR has been a beneficiary of the shift in consumer preferences to occasion and work-based categories as people go back to work and events post COVID.” Self-purchases (like sweaters) and gifts were down in the quarter.
- On the health of the consumer overall, CFO Katrina O’Connell shared, “When we look at the data, we still see that the lowest income consumer is impacted. Now what we see is that, that took a pretty big leg down in the middle of last year, but it stayed about where it is now as we move through Q4…that primarily impacts Old Navy and then some of our outlet consumers. We've seen a little softening throughout the rest of the consumer base, but nothing material.”
- Gap's inventories were sold through which materially improved the business’ cash generation and inventory turnover improved to 4.2X. The company ended wit $1.2B in cash. For 2023, management expects sales to decline low- to mid-single digits, but to improve gross margin while also removing $550M in costs. “We are flattening the organization by increasing spans of control and decreasing management layers to improve the quality and speed of decision-making, starting with our leadership team. Each of our brands now have consistent leadership structures focused on delivering excellence for our customers by elevating design and brand creative, focusing on merchandising end-to-end and providing better oversight to the customer experience across all markets and channels. We estimate that these actions will result in $300M of annualized savings…[on top of the $250M in savings previously announced],” said Martin.
- On Gap Inc’s CEO search, Martin said, "We are getting close to naming a new CEO. The Board and I remain determined to land the right leader, an external candidate.”
- Shown below is fiscal Q4 2022 visits per venue for each of the company’s brands compared to a lead competitor. (For context, the average Old Navy store at 15,000 square feet is substantially smaller than Kohl’s at 70,000 square feet.) Locations produce a large number of visits both in an absolute and relative sense. What’s needed is an improvement in conversion rates. Getting inventory at lower levels and turns higher was the necessary first step to be in a more liquid position so that the brands could transition to “chase mode.” While late-March and April will be the more telling periods for judging an improvement in the sales trend, management did share that current 1Q 2023 business trends are currently tracking better than 4Q 2022.