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Investment Overview for Abercrombie & Fitch Co. (NYSE:ANF)
WHAT HAS CHANGED?
- Abercrombie & Fitch posted its 14th consecutive quarter of declining sales in the second quarter, while at the same time saying the comparable sales will remain challenging for the remainder of the year as well. This is a swift about-face from the forecast the company issued in May, when it expected results to improve in the second half of the year. Lower traffic, particularly from tourists can be primarily blamed for this. Moreover, the company has struggled to compete with fast-fashion brands, such as Zara and H&M. While Abercrombie has attempted to convert Hollister into a fast-fashion house, by hiring designers to keep up with the trends, and shifting away from the logo-centric designs, the comparable sales for the brand fell in the quarter, after a flat performance in the first quarter. The company is also remodeling its Hollister stores, with 32 remodeled in the quarter and a further 20 to be completed by the end of the year. Additionally a new A&F prototype is being developed, which will be tested in early 2017.
- After a number of periods of poor sales, the company has been undertaking a number of changes to turn the business around. Some of these efforts include removing its infamous logo, which the retailer began phasing out in 2014, and a massive rebranding effort. The company has undertaken this initiative after parting ways with its former CEO Michael Jeffries in late 2014, to move away from the reputation it had built in the last decade. This was reflected in its men's lineup, which fused its roots as a hunting and fishing store, with a more contemporary style. Aaron Levine, who joined the company last year as the head of men's design, had a major role to play in this. Abercrombie released two new casual luxury lines with a refreshed design philosophy, which will be available for retail in July. The company's women's line also featured a more sophisticated and classic look. The advertising campaigns are also moving towards something more consumer friendly. The company also used Indian model and activist Neelam Gill, in its last Fall's campaign.
- Abercrombie & Fitch has been concentrating on its Direct-to-Consumer (DTC) sales, which includes online and omni-channel sales. This channel accounts for almost a quarter of the company's sales. The company has undertaken significant investment for its online and omni-channel strategy, with a further $70 million expected in 2016, while at the same time undertaking an aggressive store closure program. The company has started a number of initiatives such as 'Click and Collect,' which is ordering online and collecting in the store, which was rolled out in all stores in the US in the first quarter of 2016. It further plans to start shipping from the stores internationally in Canada, and the UK, in the next quarter. A robust international DTC business is being developed, which includes localized websites, local language, and local currency. Furthermore, since mobile now accounts for over 60% of its online traffic, and nearly 40% of its DTC revenue, posting double-digit increases in conversion rates year on year, the company has also worked on improving its mobile website and app, to make the customer experience better. The company also announced a partnership with online retail platform Zalando recently, which will give the company access to its over 18 million active customers.
- 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 the strong performance of Hollister in international markets. The figure however declined substantially to $406 in 2013, $356 on 2014, and $338 in 2015 as a fair portion of consumer spending on basic apparel shifted to fast fashion brands such as Zara and Forever 21. Going forward, we expect Hollister stores to register a marginal decline this year and recover thereafter to $359 in the long term, thanks to its updated product portfolio. The retailer's efforts to turnaround its product portfolio should help it attract customers in the long run. However, if the prevailing weak macro-economic conditions in Europe threaten to put a break on Hollister's international growth, and its re-fabricated merchandise portfolio fails to entice customers, significant growth in this metric will become extremely unlikely. If the brands' revenue per square foot continues to decline in the near term, reaching $333 by the end of the Trefis forecast period, there could be 5% downside to our price estimate. Conversely, if Hollister gets its products right, which brings customers back in the U.S. and Europe, pushing revenue per square foot to $430 towards the end of the Trefis forecast period, there could be about 5% upside to our price estimate for Abercrombie & Fitch.
- Hollister Stores' EBITDA Margin: Hollister Stores' EBITDA Margins declined drastically in 2011 due to a sudden increase in cotton costs, but recovered in 2012 as prices fell. In 2013, margins once again fell to 23.4% driven by heavy traffic driving promotional activities and settled at 22.6% in 2014. In 2015, the brand witnessed a marginal recovery to 23.5%, which it may be able to sustain in the near term. However, if Hollister's revamped merchandise portfolio allows it to operate with fewer discounts and helps improve margins rapidly to 26% by the end of the Trefis forecast period, there can be about 5% upside to our price estimate. Conversely, if margins plummet to 20% instead, there can be about 5% downside to our price estimate for the company.
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. The company used to operate stores and a website offering bras, underwear, personal care products, sleepwear and at home products for women under the Gilly Hicks brand. However, it has recently discontinued this brand.
Higher number of Hollister stores than Abercrombie & Fitch stores
Abercrombie & Fitch operates around just 260 namesake stores globally, while it has over 550 Hollister stores, which are comparatively smaller in size. However, Abercrombie & Fitch stores generate better revenue per square foot as compared to Hollister, because it is a relatively expensive brand. Nevertheless, having a significantly higher store count, Hollister contributes a higher value to the company.
Rapidly growing direct to consumer business
Internet revenues increased from $310 million in 2008 to $701 million in 2012, and reached an estimated $900 million in 2014. 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 and an omni-channel portfolio remains a high priority for the company.
Consolidation of Abercrombie & Fitch stores in the U.S.
Abercrombie & Fitch is looking to reduce its U.S. store fleet to an optimal size, as it takes significant strides towards the development of an omni-channel platform. Also, with its top line under pressure, the company is relying on this strategy to defend its bottom line growth. Abercrombie & Fitch has closed significantly more stores in the U.S. over the past three years than it has opened. In 2015 in particular, the company closed a total of 60 stores, while it opened just 21.
Although store consolidation has weighed on the company's revenue growth, it will eventually lead to an improvement in productivity and will provide the retailer an optimum network for its omni-channel ambitions.
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. The company announced in the past 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. In line with this announcement, the company opened just 16 stores in international markets in 2015.
Significant transition in merchandise portfolio
There was a time when Abercrombie’s logo on basic t-shirts and jeans was enough to attract customers, but it is no longer the case. Over the past two to three years, U.S. shoppers have shown great interest in fashion-forward products from Zara, Forever 21, and H&M, but little affinity towards logo branded basic products from Abercrombie.
It appears that the company has finally realized that what it used to do, will no longer help it attract customers. In fact, it will continue to hinder the company’s image and sales. As U.S. buyers have shunned basic logo products altogether irrespective of the brand, Abercrombie has decided to aggressively transition its portfolio from basic logo products to non-logo fashion products. In 2014, in an earnings announcement, the management stated that they will reduce their logo business to “almost nothing” within 12 months and replace it with fashion-forward inventory. Although the change appears too drastic, we believe that this was a much needed step. The company is finally done with its portfolio transition and it has begun to see some positive effects.
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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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