Abercrombie & Fitch's 5% Secret? A Fully Balanced Funnel

Abercrombie & Fitch Co. is continuing its red-hot comeback streak, posting quarterly sales gains of 22% as it breaks records in both revenues and profits. While the company is investing heavily in in-store experience, tech and product improvements, the company gives much credit for its success to the still-evolving approach to marketing investments, which it is applying at both A&F and Hollister, its teen brand.

Sales at the New Albany, Ohio-based company rose to $1 billion for the first quarter from $836 million a year ago. And comparable sales rose 21%. Abercrombie brands fared best, up 31%. Hollister rose 12%.

Net income soared to $113.9 million, compared to $16.6 million.

And for the year ahead, the retailer increased its predictions, now forecasting sales growth of 10%.

While the company’s comeback story involves many elements, including plenty of savvy expansion in markets outside the U.S., A&F spent plenty of time on its recent call explaining how shifting marketing investments are driving the company’s outsized gains.

In the recent quarter, A&F spent 5% of its $1 billion in sales on marketing, up from 4%. “What’s exciting about our current marketing spend is that we’re, with the strength of the brands, able to spend that marketing over the bottom, middle and top of the funnel,” said Fran Horowitz, chief executive officer. That entailed “starting in the bottom and the middle, and now doing lots of top of funnel to make sure that we acquire those customers,” she said in an earnings call webcast for investors transcribed by Seeking Alpha.

That includes events like a recent partnership with Pinterest, highlighting wedding trends in a Los Angeles-area pop-up.

Horowitz said the company is now adapting that strategy for Hollister’s teen audiences, including a recent music festival.

That 5% is something of a sweet spot,  according to Scott Lipesky, the company’s executive vice president and chief financial officer. “You can drive the business short-term, but you also want to drive that business long-term, and we’re super-focused on customer acquisition and getting people into our brands,” he said. "We love our offering at this point, so we’ll continue to get that spend around that 5% and find more customers.”

The earnings report also sent the company’s stock into new-record territory, up as much as 20%, as the A&F fan club keeps growing. “Thanks to strong assortments, good marketing, and an excellent customer experience, it has secured the loyalty and spending of its core customers as well as attracting new ones,” writes Neil Saunders, managing director of GlobalData. “This has allowed it to expand its market share substantially.”

In addition to record-setting sales growth, A&F “has also produced the best comparable sales growth in over a year and accelerated total sales growth over the last quarter,” he says. “There are very few established retailers producing this level of growth in the market.”

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