Price wars show no signs of stopping
In fiscal 3Q17, Abercrombie & Fitch’s (ANF) gross margin fell 90 basis points to 61.3%. Its gross margin was impacted as the benefits achieved from lower AUC (average unit cost) were negated by lower AUR (average unit retail). Its fiscal 3Q17 gross margin was impacted by an intense promotional environment and currency headwinds.
However, its operating margin increased 20 bps (basis points) to 2.6% in fiscal 3Q17. Its adjusted operating margin saw a 260-bps improvement to 4.3%, driven by extensive cost containment efforts. The company said it was on track to achieve $100 million in cost cuts in fiscal 2017.
For fiscal 4Q17, management expects its gross margin to fall 100 bps as lower AUR continues to erode the benefits of lower AUC. Operating expenses are expected to fall 1% to $553.7 million as higher volume-related expenses and negative foreign exchange impacts likely weigh down its cost cuts.
Retail grappling with margin woes
The intense promotional environment and the rise of e-commerce giants such as Amazon (AMZN) have hurt the profitability of most brick-and-mortar retailers. To cope with online retailers, many traditional retailers are making huge investments in developing their digital and omnichannel capabilities. That and an intense promotional environment are weighing on their margins.
In fiscal 3Q17, American Eagle Outfitters (AEO) reported a decline in its gross margins due to escalating discounts and shipping costs. On the other hand, Gap’s (GPS) adjusted gross margin improved due to strong comps (comparables) growth.
In the next and final part of this series, we’ll look at analysts’ recommendations for Abercrombie & Fitch stock.