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Dec. 3, 2020, 10:16 a.m. EST

Abercrombie & Fitch is closing 7 flagships that account for 10% of global square footage but only 1% of revenue

Tonya Garcia

Abercrombie & Fitch Inc. (NYS:ANF) will have seven fewer flagship stores by the end of January 2021, but the benefits to the business will far outweigh the loss.

One store in Dusseldorf, Germany, has closed. In January, the company will shutter flagships in London, Paris, Munich, Brussels, Madrid and Fukuoka.

“While only seven locations out of our store base of 849, this announcement is meaningful on many levels,” said Chief Executive Fran Horowitz on the earnings call last week.

See: Burlington Stores, which doesn’t sell online, says it will gain as stores shutter and customers look for value

“These flagships, which, combined, are roughly 200,000 gross square feet, or 10% of the Abercrombie & Fitch brand global square footage, have taken an outsized portion of our time and resources for years and are not an accurate representation of the Abercrombie & Fitch brand today.”

Some other interesting numbers: The seven stores generated just 1% of revenue, and accounted for $30 million in store occupancy fees and payroll expenses.

“As a result of our actions, we have removed roughly $85 million of lease liabilities from our balance sheet,” Horowitz said.

Moreover, these locations depend on a robust tourism environment and have been squeezed particularly hard by the coronavirus pandemic.

“Closing flagships is a critical part of our ongoing work to reposition our store network to more intimate omni-enabled stores to better serve our local customer and represent our updated brand positioning,” said Horowitz.

“Omni-enabled” retail integrates digital services and e-commerce into the store experience.

Another 25% of the company’s leases are coming up for renewal in the near future. And while the company is still thinks stores are important, Horowitz notes that third-quarter digital sales were up 43% to $382 million.

Watch: How to pick winners in the retail sector amid the pandemic

Total sales for the quarter was $820 million, down 5% year-over-year, but not as steep as the 15%-to-20% decline the company forecast in the second quarter.

“Although foot traffic to malls is under pressure, Abercrombie has used its strong connections with customers – including via social media and its loyalty scheme – to keep consumers connected to the brand,” wrote Neil Saunders, managing partner at GlobalData. “These marketing efforts paid off.”

Saunders also credits that company with having the clothes people want to buy during the pandemic: pajamas, joggers and other comfortable items.

“Abercrombie’s 3Q20 performance suggests its brands are becoming more relevant with consumers. Perhaps more importantly, Abercrombie’s strong expense control indicates there is more upside to margins than we previously thought,” wrote UBS analysts in a note.

UBS rates Abercrombie stock neutral with a $21 price target.

Abercrombie shares have soared 66.4% over the past three months and have gained 22.2% for the year to date.

The benchmark S&P 500 index (S&P:SPX) is up 13.8% for 2020 so far.

Link to MarketWatch's Slice.