Abercrombie Earnings: Hollister Needs A Spinoff

(Bloomberg Gadfly) -- The last thing America needs is another mall-based retail chain that caters to fickle teenagers. But maybe investors should make an exception for Abercrombie & Fitch Co.'s trendier, So-Cal inspired Hollister brand. 

The surfer-style teen shop launched by Abercrombie in 2000 reported year-over-year sales growth for the second quarter in a row Thursday, sending shares in Abercrombie up as much as 15 percent, its highest one-day bounce since Nov. 2015.

Hollister's results stood in stark contrast with Abercrombie's namesake brand, where sales fell 13 percent from a year ago. In fact, Abercrombie hasn't seen year-over-year sales growth since 2011. 

The split brings up an interesting idea: Maybe it's time to spin off Hollister, which seems to resonate much more with younger teenagers looking for lower price points than what its parent company offers. 

Over the years, Hollister has become a larger part of Abercrombie's business. It now brings in 57 percent of the company's annual revenue, up from 29 percent in 2005. Hollister also makes up 60 percent of the company's 900 store locations. 

Abercrombie doesn't break out what portion of its profits come from Hollister. But Hollister likely has lower margins, as prices on its t-shirts and jeans can be about one-fifth lower than Abercrombie's.  

Still, it ranks fifth among preferred clothing brands for the 6,500 teenagers surveyed last year by Piper Jaffray analysts, after Nike, American Eagle, Forever 21, and Ralph Lauren.

We also don't know exactly how much of Abercrombie's online sales come from Hollister, now that 30 percent of the parent company's revenues are digital. But it's safe to assume it's a large proportion, as system-wide sales are much higher for Hollister than for Abercrombie. 

Hollister's successful loyalty program has 5 million members, who spend more than non-members per visit. It was also an early adopter of teen favorite Snapchat and is among a select group of retailers helping Instagram test a new e-commerce feature. 

And Hollister's styles are resonating with younger consumers, which is not happening at Abercrombie. Efforts to win over shoppers with new products just don't seem to be taking, executives said Thursday. 

Just as L Brands Inc. sold the The Limited  to private equity in 2010 to focus on its more-successful Victoria's Secret and Bath and Body Works brands, Abercrombie could split off Hollister.

If Hollister left Abercrombie with most of the combined company's debt, it would be a retail brand with a clean balance sheet that's actually growing sales -- a rarity in today's retail world. 

Of course, Hollister would still have to face off against the fast-fashion giants Primark, H&M, and Zara, which have stolen shoppers from Abercrombie and other fading teen icons.

But Hollister would have more of a fighting chance without Abercrombie weighing it down.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

1. Limited Brands once owned Abercrombie Fitch. It spun it off in

To contact the author of this story: Shelly Banjo in New York at sbanjo@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.