Abercrombie & Fitch’s Tough Run With Inventory Management

by Trefis Team
-6.28%
Downside
41.76
Market
39.14
Trefis
ANF
Abercrombie & Fitch Co.
Rate   |   votes   |   Share

Abercrombie & Fitch‘s (NYSE:ANF) performance has fluctuated over the past year mainly due to its inventory management issues. In early 2012, the retailer was struggling with excess inventory at its stores and had to usher in large scale promotions that weighed on its comparable store sales growth. Although the company tried to have a better control over its inventory in the subsequent months, the results remained the same. Due to a slower growth in its inventory levels, Abercrombie could not keep up with the market demand in Q1 fiscal 2013, which again dragged its comparable store sales down. Maintaining optimum inventory level is extremely important for a retailer. How the inventory is trending compared to the overall demand is something that investors should closely monitor.

See our complete analysis for Abercrombie & Fitch

Inventory Surplus

In early 2012, Abercrombie was facing problems in managing its inventory which led to accumulation of merchandise at its stores. To clear this, the retailer ushered in massive promotions which resulted in a decline in the average price per unit. This not only impacted the comparable store sales, but also weighed on the company’s margins. The comparable store sales declined by 8% during the first of half of fiscal 2012. [1] The main reason behind the extra inventory was Abercrombie’s buying strategy, which is focused on anticipating the success of upcoming fashion trends followed by appropriate bulk purchases. Although it predicts the success of these fashion trends through rigorous testing and R&D, there is always an associated risk when fashion tends to change rapidly.

Abercrombie addressed this issue to a certain degree in Q3 fiscal 2012. 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. However in Q3 fiscal 2012, Abercrombie increased its inventory at a much slower pace than its sales growth. [2] Moreover, the retailer started sourcing the goods from within the U.S. and low-cost destinations of Central America, thus reducing the lead time. [3] This helped Abercrombie in rolling out fresh apparel and reducing the number of markdowns, which offset some of the comparable store sales decline (-3%). [4]

Inventory Shortage

During the fourth quarter of fiscal 2012, Abercrombie maintained a low carryover of fall inventory and reduced its overall inventory by almost 35% as compared to the previous year. [5] This resulted in fewer markdowns and an improvement in average prices for sales items and margins. Complemented by lower production cost, Abercrombie’s gross margins increased by 920 basis points over Q4 fiscal 2011 and comparable store sales declined by only 1%. [5] However, the retailer went too far with its inventory control.

Abercrombie’s inventory levels dipped too low in the first quarter of fiscal 2013, leading to a sharp 17% decline in its comparable store sales. It ended the first quarter with 23% lower inventory as compared to Q1 fiscal 2012. According to the company’s management, about 10% of the 17% decline in comparable store sales was due to inventory issues. [6] The main reason behind this was the low inventory carryover and delayed spring deliveries. Abercrombie is likely to face similar problems in the upcoming quarter.

Our price estimate for Abercrombie & Fitch stands at $49, implying a premium of about 5% to the market price.

Notes:
  1. Abercrombie & Fitch’s SEC filings []
  2. Abercrombie & Fitch Q3 fiscal 2012 earnings transcript, Nov 14 2012 []
  3. Abercrombie & Fitch Q2 fiscal 2012 earnings transcript, Aug 15 2012 []
  4. Abercrombie & Fitch’s SEC filings []
  5. Abercrombie & Fitch Q4 fiscal 2012 earnings transcript, Feb 22 2013 [] []
  6. Abercrombie & Fitch’s Q1 fiscal 2013 earnings transcript, May 24 2013 []
Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Abercrombie & Fitch Co. Logo
  • commented 1 years ago
  • tags: ANF AEO ARO
  • Inventories definitely is a big part in merchandises. You need to be able to stay on top in order for the business to be strong. Now there are a lot of tools that can be used for inventory management. One of them is Cyberstockroom (www.cyberstockroom.com). Now managing inventories are made much more easier.