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Investment Overview for Abercrombie & Fitch Co. (NYSE:ANF)
- Hollister Stores Revenue per Square Foot: Hollister stores revenue per square foot increased by a massive 21% in 2011 to reach $450 and further rose to $475 in 2012. This increase was primarily due to strong performance of Hollister in international markets. We expect the trend to carry forward, and forecast revenue per square to increase and reach $546 by the end of the Trefis forecast period.
However, the current weak macro-economic conditions in Europe threaten to put a break on Hollister's international growth. If weak macro-economic situation in Europe persists and revenue per square foot just reaches $490 by the end of the Trefis forecast period, there could be 5%-10% downside to our price estimate. Conversely, if the European economy recovers fast, the brand expands in lucrative markets such as Russia and Germany, and revenue per square foot increases to $650 by the end of the Trefis forecast period, there could be 5% upside to our price estimate.
- Hollister Stores EBITDA Margin: Hollister Stores' EBITDA Margins declined drastically in 2011 due to a sudden increase in cotton costs. In 2012, despite lower cotton prices, the decrease continued as the company ushered large discounts due to inventory hangover. However, the company has started addressing this issue, which should reflect as better margins in the future. We expect the figure to slightly increase and stabilize at 18.4% by the end of the Trefis forecast period.
However, if the apparel market continues to be exceptionally promotional and margin's plummet further to 16.5% by the end of the Trefis forecast period, there could be 5% downside our Trefis price estimate. Conversely, if the macro-economic conditions improve, promotional environment ceases to continue and margins increase to 20%, there could be 5% upside to our price estimate.
Abercrombie & Fitch is a specialty retailer that operates stores and websites selling casual sportswear apparel, including knitted and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products, and accessories for men, women and kids under the Abercrombie & Fitch, Abercrombie kids and Hollister brands. In addition, the company operates stores and a website offering bras, underwear, personal care products, sleepwear and at home products for women under the Gilly Hicks brand.
Hollister stores revenue per square foot and number of Hollister stores
Solid international business was the primary growth driver for Hollister stores revenue per square foot in 2011 & 2012. Additionally, Abercrombie doubled its intentional Hollister stores count in 2011 by opening 39 new stores. It further added 40 such stores in 2012 and has plans to another 20 this year.
Rapidly growing direct to consumer business
Internet revenues increased from $310 million in 2008 to $701 million in 2012. The aggressive growth is expected to continue going ahead. With the anticipated growth in online apparel sales in the U.S., Abercrombie's plans to become a $1 billion e-commerce brand and the development of e-commerce channels remain a high priority for the company.
Consolidation of Abercrombie & Fitch stores in the U.S.
Due to ANF's over expansion in the U.S., fewer promotions and the economic downturn of 2008-2009, its comparable store sales fell by 13% and 23% in 2008-2009. However, with the consolidation of under-performing stores and the improvement in the economy, Abercrombie & Fitch stores have started to recover. The retailer reduced the total number of ANF stores from 358 in 2008 to 290 in 2012. At the same time, the revenue per square feet increased from $440 to $518.
Controlled expansion in Europe due to weak economic environment and threat of self-cannibalization
Abercrombie's growth in Europe has been under pressure primarily due to the weak economic environment and self-cannibalization. For instance in Q3 fiscal 2012, international comparable store sales declined by 18%. Self-cannibalization has become a concern due to the retailer's over expansion in tourist locations and local catchments. The company has announced that it will slow down the expansion in the European markets. To expand in the region, under-penetrated markets will be targeted to negate the impact of cannibalization. Although the weak economic environment in Europe poses a near term threat, the region has good market potential over the long run.
Proper inventory control
During 2011, Abercrombie & Fitch has had difficulty in managing its inventory. This resulted in excessive promotions, which led to decline in the average price per unit. This not only impacted the comparable store sales, but also weighed on the retailer’s margins. To address this issue, Abercrombie & Fitch is increasing its inventory at a much slower pace than the sales growth. The retailer had a very low inventory turnover in 2011 (ratio of sales to inventory), indicating that the increase in sales was lower than the increase in inventory. Moreover, the retailer started sourcing the goods from within the U.S. and low-cost destinations of Central America, thus reducing the lead time.
However, Abercrombie & Fitch went too far with its inventory control. The company’s inventory levels dipped too low in the first quarter of fiscal 2013, leading to a sharp decline in its comparable store sales. According to Abercrombie’s management, about 10% of the 17% decline in comparable store sales was due to inventory issues. Abercrombie has become a good example of how important it is for any retailer to maintain optimum inventory levels.
Better customer engagement
Abercrombie recently initiated its first global market research study to better understand customers and competitors in different markets such as North America, Europe and Asia. Also, the retailer launched a loyalty club program for its ANF brand last year that offers discounts, gift certificates and other rewards. It provides free shipping for online orders and access to exclusive music videos and photo galleries on its website. n the initial stages of this program, more than 750,000 customers signed up and started buying more than the regular customers. Towards the end of the fourth quarter, this figure increased to more than 1.5 million. This is in addition to 3.5 million existing customer contacts. Such programs will help Abercrombie in keeping the customers interested in its brands.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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