Abercrombie & Fitch (NYSE:ANF) continued its good performance in the fourth quarter of fiscal 2012. The retailer’s revenues increased by 11% due to a weak comparable period and growth in its direct-to-consumer business. With better control over the inventory, Abercrombie was able to reduce the number of markdowns, which helped its sales and gross margins. In addition to this, the consolidation of the retailer’s ANF stores in the U.S. and its strategic expansion in European markets helped its results in these two regions. Also, Abercrombie’s performance during the holiday season remained steady with positive comparable store sales growth.
Direct-To-Consumer Business Remains The Key Driver
The apparel industry is on the mend with major players such as Urban Outfitters (NASDAQ:URBN), American Eagle Outfitters (NYSE:AEO) and Gap (NYSE:GPS) benefiting from growth in the direct-to-consumer channel. For Abercrombie, this is the fastest growing and the most valuable segment. The retailer’s direct-to-consumer revenue growth averaged nearly 35% annually during 2010 and 2011.  The momentum continued in Q4 fiscal 2012 as revenues grew by 26% and comparable sales were 17% higher.
Despite a weak holiday season in the U.S., direct business’ comparable sales growth remained strong during November-December.  The growth was not just limited to the U.S. Over the last two quarters, Abercrombie’s international direct-to-consumer revenues have increased by 30% on average with Europe being the strongest despite weak economic conditions.
Lower Inventory Carryover Helping The Margins
Abercrombie has faced difficulty in managing its inventory in the recent past. This resulted in excessive promotional discounts leading to a decline in average prices. This not only impacted the comparable store sales but also weighed on the retailer’s margins. In Q3 fiscal 2012, Abercrombie started responding to this problem by increasing its inventory at a much slower pace than the sales growth. The retailer continued this in the fourth quarter with a low carryover of fall inventory. 
In Q4 fiscal 2012, the retailer’s inventory was 35% lower than it was a year ago.  This helped Abercrombie in reducing the number of markdowns, which helped improve average prices for sales items and margins. Complemented by lower production cost, Abercrombie’s gross margins for the quarter improved by 920 basis points in comparison to Q4 fiscal 2011.  From a long term perspective, tight inventory control will help Abercrombie achieve steadier results.
Consolidation Of ANF Stores In The U.S. Increasing Store Productivity
Abercrombie has been consolidating its under-performing ANF stores in the U.S. to improve store productivity. This has helped the retailer in the past as its revenue per square feet increased from $440 in 2008 to $500 in 2011, while the store count has come down from 358 to 310.  Complemented by the consolidation strategy, the U.S. business has registered positive comparable sales growth in the past 12 consecutive quarters.  Abercrombie plans to further close down 50 stores in the U.S. across all its brands in fiscal 2013.
Emphasis On Improving Brand Popularity Should Help In Long Run
In August 2012, the retailer launched a loyalty club program for its ANF brand that offers discounts, gift certificates and other rewards. Moreover, it provides free shipping for online orders, and access to exclusive music videos and photo galleries on its website.  In 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 and promotions will help Abercrombie in competing in a highly competitive U.S. apparel industry.
Improving International Results Driven By Strategic European Expansion
Abercrombie started to show some improvements in Europe as comparable store sales fell 2% in Q4 vs. -18% in Q3. The silver lining was that Abercrombie’s stores in Scandinavia, Belgium and Spain continued performing well and generated positive comparable sales in this quarter.  We believe that Europe holds good potential for the retailer once the economy recovers.
Our price estimate for Abercrombie & Fitch Stands at $51, implying a premium of less than 10% to the market price.Notes:
- Abercrombie & Fitch’s SEC filings [↩] [↩] [↩]
- Abercrombie & Fitch Q4 fiscal 2012 earnings transcript, Feb 22 2013 [↩]
- Abercrombie & Fitch Q4 fiscal 2012 earnings transcript, Feb 22 2013 [↩] [↩] [↩] [↩] [↩]
- Abercrombie & Fitch launches club loyalty promising, exclusive online photos and other content, Business Journal, Aug 15 2012 [↩]