Abercrombie & Fitch Takeaways After Strong Results

by Trefis Team
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Abercrombie & Fitch Co.
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Abercrombie & Fitch (NYSE:ANF) recently reported its Q3 fiscal 2012 earnings and it was better than the market’s expectations. The results reflected a substantial increase in the overall revenues on top of a strong third quarter last year. This was driven by a significant positive contribution from the international markets, where the revenues rose by 37%. Moreover, the positive comparable store sales growth of the U.S. chain stores and direct-to-consumer business helped the results. Abercrombie also reported a slight increase in its margins due to lower production costs.

The performance can be attributed to a number of factors such as positive response to the club programs, inventory control & fashion newness. Although, the overall comparable store sales were down, it does not reflect a weak performance. The period of comparison was quite strong and the previous quarter’s comparable store sales were down substantially.

See our complete analysis for Abercrombie & Fitch

U.S. Revenues Remain Flat, But Look Promising

The overall revenues increased by 9% driven by a 37% increase in the international sales. However, the domestic sales including the direct-to-consumer business were flat. Although this might not seem to be a significant improvement, it does reflect some good signs for the retailer. The U.S. same store sales increased by 2% while the international same store sales declined by 18%. Furthermore, comparable store sales for U.S. chain stores and direct-to-consumer business increased by 7% on top of a strong 16% increase in the same quarter last year.

The U.S. chain stores including the direct-to-consumer business have registered a positive comparable sales growth in the past 11 quarters. The flat revenue growth can be attributed to the consolidation of under-performing stores. The retailer is looking to close a total of 55-60 stores in fiscal 2012. With the overall apparel industry showing signs of improvement in the U.S., we expect a good future for Abercrombie & Fitch.

As far as the international growth is concerned, delaying the expansion plans in Europe, a strong direct-to-consumer business, new store openings in under-penetrated markets & good performance in Scandinavia, Belgium and Spain were some of the highlights. The contribution from the retailer’s first three stores in China and the first store in South Korea have also helped the revenue growth. However, the comparable store sales declined considerably (18%) due to weak European economy and self-cannibalization in the region. We believe that once the economy picks up, the international business will be an even better contributor.

Good Response To Club Programs And Better Inventory Management

Abercrombie & Fitch rolled out its A&F and Hollister club programs in the beginning of the third quarter. More than 750,000 customers have signed up for this program and have contributed slightly better than the regular customers. The retailer expects the number to further rise through the fourth quarter. Moreover, Abercrombie is improving its customer database by adding 1 million email addresses and 500,000 mobile numbers. We expect that this will assist the retailer’s growth in the fourth quarter.

Abercrombie & Fitch managed its inventory better in this quarter by growing it at a slower pace than the rate of sales growth. The retailer also shortened the lead time by sourcing its merchandise from the U.S. and Central America. Inventory management is a crucial part of any retailer’s growth and we expect that with better control over the inventory, Abercrombie can eye a good fourth quarter as well.

Fashion Newness Helped The Retailer

In the previous two quarters of fiscal 2012, Abercrombie & Fitch has been quite conservative in rolling out new fashion apparels due to significant amount of inventory. With better control over inventory in the third quarter, the retailer was able to do so. As the apparel industry is highly sensitive to change in fashion trends, the retailer’s fashion newness was reflected in the third quarter’s results. If the retailer is able to sustain its control over the inventory, it will be better position to adapt to the changes in fashion trends. In the current scenario, this defines the performance and growth potential of an apparel retailer.

Our price estimate for Abercrombie & Fitch Stands at $40, implying a discount of about 5% to the market price.

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