Abercrombie & Fitch looks toward a better year in 2017

Editors' pick: Originally published March 2.

Even after a challenging holiday season, there are glimmers of hope for Abercrombie & Fitch (ANF - Get Report) . 

On Thursday, Abercrombie reported fourth-quarter earnings of 71 cents a share on $1.04 billion in revenue, lower than estimates for earnings of 75 cents a share on $1.05 billion, according to analysts surveyed at Factset.

For the full year, Abercrombie reported a net loss of 6 cents a share, steeper than the loss of 4 cents a share Wall Street was looking for and revenue of $3.3 billion, in line with expectations.

The company's same-store sales fell 6% in the U.S. for the fourth quarter versus estimates for a 3.5% slip. But there were two positive callouts that may have Wall Street cautiously optimistic on the year ahead.

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First, international sales declined by only 4%, compared to the third quarter when they plunged a staggering 10%. CEO Fran Horowitz, who was officially appointed to the role in early February, said sales internationally improved "measurably."

Second, while Abercrombie & Fitch's comparable store sales fell a whopping 13%, Hollister's same-store sales saw a 1% growth. Considering how challenging the mall environment was during the holidays, sales growth at Hollister, which is the company's largest chain, may have come as a nice surprise to investors.

Abercrombie's shares surged 14% on the news.

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TheStreet talked with Horowitz about her outlook for the year ahead and the mall scene more broadly. What follows is an edited and condensed version of our conversation. 

Abercrombie & Fitch CEO, Fran Horowitz

TheStreet: Mall traffic is very challenging right now. Yet you managed to grow sales at Hollister. How did that happen?

Horowitz: I think the reason the chain keeps performing is because we are very in tune with who that consumer is. We are really resonating with this consumer both from a product perspective and a voice. It has been really exciting to watch. We continue to believe we have not only stabilized Hollister, but will continue to see momentum. 

TheStreet: Hollister has invested in lower prices for more than a year. Is that partly a factor here driving the business?

Horowitz: Absolutely. I think we are very competitive in this space, and [we] give our consumer incredible quality for what they are paying for. So, yes, they are responding to the lower prices for sure. 

TheStreet: What did you mean on the earnings call when you said you now have to sharpen the image of Abercrombie & Fitch? 

Horowitz: We have confirmed that 80% of our consumers, particularly in the U.S., are over the age of 18. So when we reference Abercrombie as being an American casual luxury brand for the 20-something- year-old consumer, that is our direction and focus. We are convinced we are in the right place for that consumer. The misstep in Abercrombie during the fourth quarter was really tied to assortment and our inability to build out enough of our key items. 

But, we believe we are seeing some positive momentum in the Abercrombie business. 

The Abercrombie brand is no longer a teen-only brand

TheStreet: A lot of specialty apparel retailers went bankrupt last year. Meantime, department stores such as Macy's (M - Get Report) are closing stores in droves. How are some of these changes in the mall going to impact Abercrombie?

Horowitz: There is no question there could be a market share gain for us. What we have done well, and continue to do, is utilize our channel optimization. So we are very focused on the flexibility in our leases and making sure each and everyone of those is flexible. We are investing a lot in direct to consumer. Almost 40% of our business today comes off of mobile where we have also made a significant investment in our app. 

With that said, the mall traffic is challenging, but we can control things such as in-store conversion and customer engagement, and those are the things we are focused on. 

TheStreet: Abercrombie has 50% of its store leases expiring by the end of 2018. Wall Street seems to think you may close 50% of your stores. Can you explain what you plan to do as these leases come up for renewal?

Horowitz: We have closed close to 400 stores over the past five years. We were way ahead of the curve on this whole process. The fact the leases expire, that just gives you flexibility to close stores if they are losing money. It gives you flexibility to reduce the size of the store, or perhaps negotiate a different location. 

TheStreet: So, it's not like you will be closing 50% of your stores, you may decide to refresh the look of a store?

Horowitz: That's one of the options. Negotiating rent relief is another option. Negotiating a reduced space is an option. 

Abercrombie is keen on Snapchat

TheStreet: Abercrombie & Fitch is very much an American brand. Any plans to manufacture in the U.S. in light of all the talk about a possible Trump border tax?

Horowitz: Well, we currently do some manufacturing on the West Coast. We are always keeping our options open. 

TheStreet: Have to ask in light of all the discussion around the Snapchat IPO. How does Abercrombie use Snapchat as a sales driver?

Horowitz: Currently, I think Snapchat is more of a marketing opportunity for us. Take Hollister. Brand sentiment and engagement is very important for the Hollister consumer. So we have seen tremendous engagement through our use on Snapchat. Our takeover on Snapchat for National Pizza Day got over 6 million views. So, we need to be wherever our consumer is, whenever they are there. 

TheStreet: Have sales picked up from using Snapchat? Can you even measure that?

Horowitz: You cannot measure that directly at this point in time. 

Editors' pick: Originally published March 2.