Apparel retailers get squeezed in Q1

Table of Contents1 Abercrombie & Fitch Co.2 American Eagle Outfitters3 Express4 Gap Inc.5 Guess6 Ralph…

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Earlier this year, things were looking up for clothing retailers.

Month after month, specialty apparel and department stores this year have posted healthy gains, as occasions went back on the calendar and offices opened back up. Consumers, who quarter after quarter had little need to get out of their sweats, at long last refreshed their wardrobes.

But the respite may be over. Inflation is taking a toll on household budgets, so that discretionary spending for many is back on hold. Moreover, executives at some retailers noted that the boost that was coming from the federal government’s pandemic-related support has mostly dried up.

Here’s how some major apparel chains fared in their most recent quarter.

Abercrombie & Fitch Co.

The good news at Abercrombie & Fitch Co. is that its namesake brand seems to have successfully escaped the murky past that is the subject of an unflattering Netflix documentary. The bad news is that its Hollister brand is faltering, with Q1 sales down 3%, and that freight costs are squeezing margins companywide, with little sign of much relief for the rest of the year.

“While Hollister is very far from being a broken brand, it has been an engine of growth for Abercrombie & Fitch, so if it spins more slowly the effects will be felt,” GlobalData Managing Director Neil Saunders said in emailed comments. In light of that, diversifying with new brands like Social Tourist, which is set to open a pop-up in Los Angeles, makes sense, he also said.

The company had its best Q1 topline performance since 2014, as net sales rose 4% year over year to $813 million, according to a company press release. That was driven by ongoing strength at the Abercrombie & Fitch brand, where net sales grew 13% and global sales were higher than expected, the company said. However, the company was in the red in the period, with a net loss of $16.5 million, from net income a year ago of $41.8 million. Inventories were up 45%, and operating margin failed to reach company expectations because of the higher-than-expected freight and product costs, per the release.

Abercrombie & Fitch Co. lowered expectations for the year. But it may have to trim more costs than it expects in order to achieve its margin goals, William Blair analysts said in a May 24 client note.

American Eagle Outfitters

Inflation and cold weather got the better of American Eagle in the first quarter. Total net revenue rose 2%, or $20 million, to $1 billion, with its supply chain acquisitions contributing about 3 percentage points, according to a company press release.

By brand, revenue at the company’s namesake dropped 6% year over year to $686 million and rose 8% at Aerie to $322 million. Revenue at stores rose 2% year over year and 1% compared to 2019, while digital revenue fell 6% year over year and rose 48% compared to 2019.

Higher freight costs took a $35 million bite out of operating income, which fell 68.6% to $42 million. Net income fell 66.8% to $31.7 million. About a year ago, many consumers were still supported by federal pandemic relief payments and many retailers, including American Eagle, had tighter control on inventory. In its release last week, American Eagle said inventory was up 46%, but that it’s adjusting to demand and clearing through excess spring goods in the second quarter.

“Lapping stimulus payments and pent-up demand, combined with rising inflation and higher gas prices weighed on our results,” CEO Jay Schottenstein said, according to a Seeking Alpha transcript. “Adding to these pressures, the weather was unseasonably cold, dampening sales of spring goods. Higher freight and expenses deleveraged droves and operating profit results that was well below plan and what we are capable of delivering. In hindsight, our buys and overall plans were too optimistic for the current environment. We are taking swift measures to reset.”