Abercrombie & Fitch shares plummet 25% on sluggish Hollister demand

(Reuters) - Abercrombie & Fitch Co’s shares fell 25% on Wednesday after the apparel company forecast second-quarter sales below estimates amid slowing demand for Hollister, a brand that has fueled company growth over the last two years.

FILE PHOTO: An Abercrombie & Fitch storefront sign states "SALE" at the King of Prussia Mall, United States' largest retail shopping space, in King of Prussia, Pennsylvania, U.S., December 8, 2018. REUTERS/Mark Makela

The company also said it would close three flagship stores, including a Hollister store in SoHo, New York City, incurring about $45 million of lease-related charges in the second quarter.

Surf-themed Hollister has been a bright spot for the company as its casual and fun apparel gained popularity among young shoppers, who had previously abandoned flagship brand, Abercrombie, after its logo-emblazoned tees fell out of fashion.

However, the company’s most recent results showed that demand for Hollister was slowing, with its same-store sales rising just 2% in the quarter ended May 4, missing the average analyst estimate of a 3.3% increase, according to Refinitiv IBES data.

A year ago, Hollister’s quarterly same-store sales rose 6%.

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“Expectations were really high for Hollister, that has been their shining star ... (So) Hollister’s numbers falling short and potentially slowing, is a red flag for investors,” Gabriela Santaniello, analyst at A line Partners, said.

Chief Executive Officer Fran Horowitz said fashion missteps at Hollister in Asia and the company’s failure to not take full advantage of major promotional events on platforms such as China’s Tmall hurt international sales, which fell 6%.

Overall same-store sales in the first quarter rose 1%, below estimates of a 1.33% increase, while net sales rose marginally to $734 million.

Abercrombie forecast second-quarter net sales to be flat to up 2%, below estimates of a 2.8% increase. The company blamed its disappointing forecast on a $10 million hit from a stronger dollar, but said the outlook did not include the impact of new tariffs the United States may impose on Chinese goods.

Last financial year, about 25% of Abercrombie’s globally sourced merchandise was imported from China, but Horowitz said the company was working to bring that down to 20% this year.

Company executives also flagged slowing U.S. mall traffic and a more competitive retail landscape as a sales dampener for both Hollister and Abercrombie going into the second quarter.

Net loss attributable to the company narrowed to $19.12 million in the reported quarter, or 29 cents per share, from $42.5 million, or 62 cents per share, a year earlier.

Analysts had expected a loss of 43 cents per share on net sales of $733.4 million.

Shares of the company were down 24% at $19.01 and on course for their worst day in nearly two decades.

Reporting by Uday Sampath in Bengaluru; Editing by Shinjini Ganguli