Dive Brief:

• Abercrombie & Fitch on Thursday reported a smaller-than-expected loss, sending shares up more than 4% in early trading. Quarter two net sales were $779.3 million, (beating the $759 million FactSet estimate cited by MarketWatch). That was down from $783.2 million last year, but up slightly on a constant currency basis, reflecting a net loss of $15.5 million, or 23 cents per share, compared to a loss of $13.1 million, or 19 cents per share, in the year-ago quarter. The adjusted loss was 16 cents per share, beating the FactSet consensus estimate cited by Marketwatch for a 33-cent loss.

• Same-store sales in the quarter fell 1%, the third straight quarter of improvement in that meausre. By brand, Hollister continued its momentum, with Q2 same-store sales up 5% and 4% year to date, and Q2 net sales rising 6% to $446.6 million, while Abercrombie same-store sales fell 7% in the quarter and 8% year to date, as Q2 net sales decreased 8% to $332.7 million, according to a company press release.

• Direct-to-consumer sales grew to approximately 24% of total company net sales for the second quarter, compared to approximately 23% last year.

Dive Insight:

The company is operating with more than a third of its U.S. fleet shuttered, executives told analysts on a conference call Thursday, and they plan to close 60 more through lease expirations this year. Aside from closures, the retailer is also renegotiating leases, in some cases downsizing its space or moving its location within a given mall, executives said.

But physical stores continue to play a vital role in customer engagement, and Hollister demonstrates that, CFO Joanne Crevoiserat said. The company said it will open seven new stores in fiscal 2017, primarily in the U.S.

CEO Fran Horowitz said that customers are responding to its new store concept, including better lighting and other improvements, and executives said that its mall landlords are also pleased. Despite the good results, the company does not plan on speeding up the expansion of its new store concept; rather, it wants to keep an eye on whats working well before rolling out more widely.

While the store prototype and improved assortments at the flagship brand may signal a new direction in merchandising, those aren't translating into a strong enough brand identity, according to GlobalData Retail analyst Håkon Helgesen. "In some ways, the brand understands that it needs to reinvent, but is not entirely clear what it wants to become," he said. "In a crowded and competitive apparel market, this is fatal. Admittedly, there have been limited areas of progress in some categories, but these are insufficient to move Abercrombie onto sustainable ground. Unfortunately, there is no quick fix to brand reinvention."

After failing to present a strong spring and summer assortment, Helgesen said that fall will provide another opportunity. "We are more hopeful for fall, when we believe Abercrombie will have some success across heavier product lines like sweaters and outerwear," he said. While the store improvements, new loyalty program and marketing bode well, Helgesen said they "do not replace the need for a clear sense of direction for Abercrombie. This, in our view, remains the group's Achilles' heel."

All in all, though, there is "no denying that this quarter's results represent a step in the right direction for A&F," he said in an email to Retail Dive. 

Although Horowitz touted the strength of the Hollister brand, which she shepherded herself before taking on the chief spot for the company, and expressed confidence in the company’s strategy, she said she was "far from satisfied" despite improvements in both brands that she finds encouraging.

Her arrival from the well-performing Hollister is no accident, and executives emphasized that they’re taking lessons from the better-performing brand. "We are pleased with our progress we made with A&F," Horowitz said on a conference call Thursday. "The journey started later than the Hollister journey … and we continue to apply Hollister learnings." That includes a reduced SKU count and more depth in higher performing merchandise, Crevoiserat said.

Indeed, Hollister is gaining market share as its sibling brand continues to falter, according to Helgesen. "While Hollister has successfully navigated the path of reinvention, Abercrombie is still struggling along and has made only limited progress," he noted in an email to Retail Dive. "[I]t is clear that A&F is a company of two halves: Hollister is recovering nicely and is gaining ground, while Abercrombie is showing some signs of life but is still struggling overall."