Behind Abercrombie & Fitch’s Fiscal 4Q17 Margin Performance
Gross margin falls
In fiscal 4Q17, Abercrombie & Fitch’s (ANF) gross margin fell 90 basis points to 58.4%. Its gross margin was impacted, as the benefits from higher AUC (average unit cost) were negated by lower AUR (average unit retail). Its fiscal 4Q17 gross margin was also negatively impacted by an intense promotional environment.
However, its operating margin increased to 11.8% in fiscal 4Q17 compared with 5.9% in fiscal 4Q16, driven by improvements in store and distribution expense rates (down 580 basis points from fiscal 4Q16).
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Its adjusted operating income was $148.4 million compared with $61 million reported in fiscal 4Q16, driven by extensive cost containment efforts. Foreign exchange fluctuations added $14 million, while the 53rd week added $3 million to adjusted operating income. The company said it exceeded $100 million in its gross cost cuts target for fiscal 2017 on account of enhanced productivity in non-customer-facing operations.
Fiscal 2018 guidance
For fiscal 2018, the company expects gross margin to be marginally up from fiscal 2017’s reported gross margin figure of 59.7%. Operating expense (exclusive of other income) is expected to be up 1%. And again, favorable forex movement (net of hedging) will add $15 million to operating income in fiscal 2018.
How have peers fared?
Gap (GPS) reported a gross margin of 36.8% for 4Q17, reflecting a 310 basis-point improvement from 4Q16 driven by a higher merchandise margin. On the other hand, Urban Outfitters’ (URBN) adjusted gross margin fell 113 basis points to 32.3%. Gross margin was down 176 basis points to 31.3%. The company saw higher delivery and logistics expenses due to higher digital sales and faster shipments over the holiday period. Lower markdowns stemming from tight inventory management offered a bit of cushioning.