Abercrombie & Fitch plans to shut all flagship stores worldwide in a bid to boost profits

Thomson Reuters

• Abercrombie & Fitch plans to shut all of its flagship stores worldwide in a bid to cut costs and reshape its business.
• The teen-apparel retailer has already announced five closures as it works to double its profit margin.
• "Year by year we're looking to pick these things off one by one," said CFO Scott Lipesky on the first-quarter earnings call.
• Watch Abercrombie & Fitch trade live.

Abercrombie & Fitch plans to shut all of its flagship stores around the world as it works to cut costs and reshape its business.

The teen-apparel retailer has shuttered flagships - larger stores often located in expensive parts of major cities - in Copenhagen and Hong Kong already. It intends to close two more in New York's SoHo neighborhood and Milan, Ital, within the next year, and shut another in Fukuoka, Japan, by early 2021. The remaining 15 flagships among the company's roughly 850 stores are also set to go.

"Year by year we're looking to pick these things off one by one," said CFO Scott Lipesky on the company's first-quarter earnings call.

The store closures are part of Abercrombie & Fitch's plan to double its adjusted operating margin from 2.9% in the year to February 2018 to nearly 6% in fiscal 2020. The flagships are "drags to [comparable sales] and profitability," Lipesky said.

The company -which owns the Abercrombie & Fitch, Abercrombie Kids, and Hollister brands - has resized more than 30 stores in recent years to remove 30% of their square footage, Lipesky said. It wants to shrink the typical size of its stores from around 8,000 to 10,000 square feet to roughly 5,000 to 6,000 square feet, he added.

Getting rid of flagships including the 25,000-square-foot Abercrombie Kids and 30,000-square foot Abercrombie & Fitch stores on New York's Fifth Avenue, and the 9,000-square-foot store on London's Savile Row, would contribute towards that goal. After closing the five flagships announced so far, Abercrombie & Fitch will have eliminated more than 140,000 square feet of real estate that was generating sales below the company average, Lipesky said.

Shuttering its biggest overseas stores is also part of the retailer's efforts to "pivot away from large tourist-dependent flagships to smaller-format and mall-based locations, enabling us to cultivate a more local customer base and drive incremental digital sales," said CEO Fran Horowitz on the fourth-quarter earnings call in March.

Eliminating the flagships would be the latest in a series of steps intended to revitalize sales and appeal to the current generation of shoppers. Under former CEO Mike Jefferies, Abercrombie & Fitch was perhaps best known for its shirtless models, branded attire, and dark, loud, perfumed stores. Since his departure at the end of 2014, the company has covered up its employees, ditched logos, turned up the lights, turned down the music, and cut back on spritzing clothes.

The four flagships on the chopping block and the shuttered Copenhagen store generated less than 1% of total revenues last year. However, the costs and complexities of closing stores and escaping leases mean the remaining flagships won't close overnight or suddenly transform the company's cost base.

Management previously shelled out about $16 million to terminate the lease on the Hong Kong flagship, and expects to stomach $45 million in net lease-related charges tied to the SoHo and Fukuoka closures this quarter. As a result, they expect adjusted operating expenses to rise between 4% and 5% to around $2.12 billion this fiscal year, a sharp increase from their previous forecast of 2%.

"There's not a silver bullet whenever it comes to these flagships by closing one or two or three that's going to save the day," Lipesky said on the call. "It's going to be a methodical approach to get through these things over the years."

"While each one in itself is small, in the future...they'll add up," he added.

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