By Nina Trentmann
Finance chiefs at apparel retailers are working to reduce inventory levels, lower rent payments and rely less on promotions in an effort to increase profitability.
Clothing chains including American Eagle Outfitters Inc. and Abercrombie & Fitch Co., which primarily target teenagers and young adults, are adjusting their business models after a year in which many of their stores were temporarily closed due to the coronavirus pandemic. Online sales as a proportion of revenue continue to grow, which reduces the need to hold as much inventory and operate as many stores as before the pandemic.
"We learned we can run this business with less," said Scott Lipesky, chief financial officer of New Albany, Ohio-based Abercrombie. "You have much better margins," he said, adding that Abercrombie wants to keep operating with less stock.
The company reported inventory of $389 million as of May 1, down 9% compared with a year earlier. Abercrombie's operating income was $57 million for the quarter, compared with an operating loss of $209 million in the prior-year period.
AEO, which operates the American Eagle as well as the Aerie brands, also looks to shrink its stockpile of clothing, including by pruning its portfolio, finance chief Mike Mathias said. "There are still a lot of inventory benefits in bottoms and jeans," Mr. Mathias said. The company last year reduced the number of tops it sells at American Eagle. It is also ordering smaller quantities of clothing from its suppliers around the world, AEO said.
Smaller orders from suppliers help with reducing the amount of promotions that retailers need to run to sell their products. "We want people to buy things when they see it, and not wait for a sale," said Abercrombie's Mr. Lipesky. The company has had fewer promotions for the past three quarters, according to the CFO. "Having less inventory allows you to do that," he said.
General and specialty retailers on average held 69 days of inventory outstanding in 2020, down from 72 in 2019, according to Hackett Group Inc., a consulting firm which reviewed the 1,000 biggest nonfinancial U.S. companies by revenue. Internet and catalog retailers last year on average had 39 days of inventory outstanding, compared with 48 in 2019, Hackett said.
"The pandemic essentially forced retailers to recognize the benefits of selling less, but charging more," said Simeon Siegel, a managing director at financial-services firm BMO Capital Markets. However, continuing to do so as the economy recovers will likely prove challenging. "Holding the promotional line and watching customers walk out the door is a major strategic challenge," he said.
Closing stores and negotiating lower rents can also help apparel companies increase their profits. AEO last year closed 57 stores and signed nearly 200 short-term leases, which gives the company added flexibility as it looks to reduce the number of its American Eagle stores, Mr. Mathias said. At the end of 2020, the brand had about 850 stores in the U.S. and Canada and wants to bring that number down to between 600 and 700 by 2023, Mr. Mathias said.
AEO, which continues to open new locations for its Aerie brand, has 450 leases that are set to expire at the end of the year, he said. The company saved $7 million in rent in its first fiscal quarter, ended May 1, compared with that of 2019, which the company said it uses as a pre-pandemic reference point. Operating income in the quarter was $133 million, up from $48 million in the first quarter of 2019, AEO said on Wednesday.
Abercrombie has about 250 leases that are set to run out at the end of 2021. "If we can't get that deal, we would get out," Mr. Lipesky said, referring to negotiations with landlords. The company, which generates about half of its sales online, closed 137 stores in its latest fiscal year after the leases expired. Abercrombie began closing stores earlier than some of its competitors after it overexpanded about a decade ago, analysts said. "We still have some stores that are too big," Mr. Lipesky said.
Hennes & Mauritz AB, the Swedish clothing chain, also saved money in the past quarter by negotiating with landlords. "We get improved terms when it comes to rents," the company's CFO Adam Karlsson said at the end of March, according to a transcript.
Gap Inc., the company behind the namesake brand as well as Old Navy, Banana Republic and other labels, last week said it closed 99 stores and opened 74 during the period ended May 1, bringing the total count to 3,571.
But, it remains to be seen if costs rise again, as online sales require spending on distribution centers, transport and workers to fulfill orders. At AEO, some of the savings generated by lower rents in its first fiscal quarter were eaten up by higher logistics and supply chain costs, the company said.
"To be successful online, you have to have a strong gross profit margin, " said Jay Sole, an executive director at UBS Group AG, pointing to recent increases in freight costs and wage pressures.
AEO is currently evaluating whether to add a fourth hub to its roster of owned distribution centers, Mr. Mathias said. "We want to be closer to our customers," he said.
Congested supply chains present additional challenges, especially when operating with lower inventory levels, said Janine Stichter, an analyst at Jefferies Financial Group Inc., the financial services firm.
"There are bottlenecks in every step and there is less predictability in terms of consumer demand," Ms. Stichter said. "Executives are trying to figure out the best way to manage this."
Write to Nina Trentmann at Nina.Trentmann@wsj.com
(END) Dow Jones Newswires