Teen specialty retailer Abercrombie & Fitch (NYSE:ANF) reported its Q2 fiscal 12 results Wednesday.  As expected, Q2 earnings were centered around Abercrombie’s revised near-term growth strategy.We had earlier emphasized in our article about how Abercrombie’s near-term strategy should address both its declining international growth and losing domestic market share in order to regain investor confidence. See: Abercrombie & Fitch Earnings Preview: Near-Term Growth Strategy In Focus.
We believe Wednesday’s earnings did manage to satisfactorily address both the imminent issues surrounding. Below we highlight the major takeaways from the Abercrombie’s revised growth strategy. Abercrombie & Fitch competes with other specialty retailers such as Aeropostale(NYSE:ARO), American Eagle Outfitters (NYSE:AEO) and Gap Inc. (NYSE: GPS) in the teen apparel space.
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Abercrombie scales back its international expansion
One of the primary highlights of Wednesday’s earnings was Abercrombie’s decision to hold back on its rapid international expansion plans. Abercrombie is adopting a more cautious approach to expansion in Europe. Hollister still remains the company’s brand of preference for European expansion due to the low-risk and high-return the company earns on its European Hollister stores. Abercrombie plans to open 20 international Hollister stores in 2013 with a strong focus on under-penetrated markets in order to minimize the effect of cannibalization. With regards to the A&F flagships in Europe, Abercrombie has decided to scale back its planned Dublin & Amsterdam flagship stores into smaller Tier 1 format stores, leading to meaningful reductions in the associated capital expenditures.
In Asia, Abercrombie is taking a test-and-learn approach to new opportunities. After a successful opening of its Hong Kong flagship store earlier this year, Abercrombie plans to open a new A&F flagship in Shanghai to support its broader roll-out in China. Beyond Shanghai, the company has paused all its other Asian flagship commitments and we expect Abercrombie to review them after gauging the customer response to its Hong Kong and Shanghai stores.
Wednesday’s earnings also focused on the company’s initiatives to improve domestic stores’ profitability. Abercrombie is implementing a more conservative merchandise plan and shortening its product development calendar. We believe these steps should help the company better capture current fashion trends and decrease the lead time in bringing new product to its store shelves.
We have a revised price estimate of $57.67 for Abercrombie & Fitch stock, which is roughly 60% above the current market price. Along with a change in Abercrombie’s current net cash/debt position, the adjustments in our price estimates primarily reflect a decline in Abercrombie’s near-term revenue outlook, and adjustments to the 2012 and 2013 capital expenditures.Notes: