Abercrombie & Fitch (NYSE:ANF) is one of the leading specialty retailers in the U.S. offering casual apparel, knitted & woven shirts, jeans, woven pants, shorts, personal care products and accessories for men, women & kids. The company sells its products under Abercrombie & Fitch (ANF), Hollister, Abercrombie Kids and Gilly Hicks brands through its stores and online channel.
In this analysis we’ll discuss the factors that can help the company’s growth in the future. While the direct-to-consumer channel remains the key growth driver for Abercrombie, the company will also gain from its focus on improving store productivity through store consolidation and better customer engagement. Abercrombie has also slowed down its expansion in troubled Europe and is entering new markets that offer good growth opportunities in the long run.
Direct-To-Consumer Business Will Be The Key Growth Driver
Abercrombie’s direct-to-consumer (mainly e-commerce) revenues have grown at an average annual rate of almost 35% over the past three years. According to our estimates, this business accounts for about 40% of the company’s value making it the biggest segment for Abercrombie. We believe that the retailer’s direct revenues will continue to grow at a robust pace driven by the industry growth and its own efforts to strengthen the online channel.
The global increase in Internet usage has boosted the popularity of online shopping. Back in 1995, less than 0.5% of the world’s population used Internet and the figure currently stands at 39%.  The U.S. accounts for close to 34% of global e-commerce sales and online shopping constitutes about 11% (excluding groceries) of the region’s total retail sales.  Apparel and accessories (the second largest product category sold via Internet) alone has about 20% share in the overall U.S. online retail market.  The outlook for online apparel retail in the U.S. looks good, and eMarketer forecasts annual apparel sales via Internet to increase from $45 billion in 2012 to almost $90 billion in 2016. 
After the U.S., Abercrombie’s presence is strongest in Europe where the outlook for online retail is optimistic despite and the company’s e-commerce channel is young. According to Forrester, the region’s online sales are expected to grow at a compound annual growth rate of 11% for the next few years.  Given the trend in the U.S., we believe that online apparel sales growth in Europe will exceed overall online retail sales growth.
Also, Abercrombie is making some efforts of its own to strengthen its e-commerce channel. In 2010, it entered m-commerce using Digby’s mobile commerce platform and made its websites available on all Internet-enabled mobile devices, allowing the users to browse and purchase with convenience.  During the same year, the retailer also launched an iPad app.  Although m-commerce is still a small platform in the U.S., it has seen triple-digit growth in recent years.  As a result, Forrester expects sales via smartphones to account for 9% of total online retail sales in the U.S. by 2017, up from 3% in 2012.  Bank of America estimates retail sales through smartphones and tablets in the U.S. and Europe to increase from $25 billion in 2012 to $67 billion in 2015. 
Improving Store Productivity In The U.S.
Before the recession of 2008-2009, Abercrombie expanded its ANF stores in cities with relatively low income demographics. This yielded unfavorable results as the retailer failed to attract sufficient store traffic. As a result, the number of transactions per ANF store (measure of store traffic) declined by 16% in 2008 and 14% in 2009. However, ANF stores’ revenue per square feet started to recover with the consolidation of underperforming stores and an improvement in the U.S. economy. Also, EBITDA (earnings before interest, taxes, depreciation and amortization) per square feet improved substantially from $51 in 2009 to $70 in 2011.  The figure declined to $61 in 2012 due to excessive promotions resulting from inventory hangover. We believe that Abercrombie will continue with its consolidation strategy in the U.S. for the next few years, which will further improve its store productivity.
The company is also focusing on improving its customer engagement to drive greater store traffic and increase sales. The retailer launched a loyalty club program for its ANF brand last year that offers discounts, gift certificates and other rewards. 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 Q4 fiscal 2012, this figure increased to more than 1.5 million. This is in addition to 3.5 million existing customer contacts.  Such programs will help Abercrombie in keeping the customers interested in its brands. The company is also gaining popularity through social media platforms such as Facebook (NASDAQ:FB). A strong connection with core customers through social media will lead to better customer engagement that will help its overall sales.
Targeted International Expansion
The international business contributes around 25% to Abercrombie’s overall revenues, the majority of which come from Europe. As of 2012, the retailer operated 110 stores in Europe out of 141 international stores. Due to the region’s weak economy and self-cannibalization, Abercrombie’s international comparable store sales declined by 8% in fiscal 2012 and 16% in Q1 fiscal 2013. The retailer’s over-expansion in tourist locations and local attractions has brought self-cannibalization into the picture despite a low store count.  However, Abercrombie has announced that it will slow down its expansion in Europe and target underpenetrated markets to negate the impact of cannibalization.  We believe that this strategy will help the company stabilize its international business.
Apart from Europe, Abercrombie is entering some new markets that hold good potential for apparel retailers. Earlier this year, the company announced plans for Hollister’s expansion in the UAE, Japan and Australia.  A report by consulting group AT Kearney suggested that the UAE’s annual per capita spending on apparel sales ($785 in 2010) is the highest among all the developing markets.  Although the country’s total apparel market is still small ($5.8 billion), it has grown at a healthy compounded annual growth rate (CAGR) of 7.6% during the last four years.  Abercrombie’s success here will position it well in the Middle East, which currently houses three of the five fastest growing apparel markets in the developing world.  Although Japan’s apparel industry growth has been slow over the past few years, it’s stands large at $110 billion.  Moreover, Japanese buyers have started to prefer long-lasting value-focused apparel. Casual apparel are gaining popularity in the region due to the government’s Cool Biz campaign, which urges companies to cut down air conditioning.  This has led to increased demand for casual clothing suited for such environment.
Our price estimate for Abercrombie & Fitch stands at $49, implying a discount of about 5% to the market price.Notes:
- Internet Growth Statistics, Internet World Stats [↩]
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- US Online Retail Sales To Reach $370B By 2017, EUR191B in Europe, Forbes, Mar 13 2013 [↩] [↩]
- Retail Ecommerce Set to Keep a Pace Through 2017, eMarketer, Apr 24 2013 [↩]
- Abercrombie & Fitch And Hollister Co. Go Mobile With Digby, Digby, Jan 26 2010 [↩]
- Abercrombie & Fitch Enters Mobile Commerce, Mobile Commerce Daily, Jan 21 2010 [↩]
- Why brands should embrace m:commerce now, Biz Report, Feb 13 2013 [↩]
- M-Commerce sales via smartphones hit $8 billion in 2012, Internet Retailer, Jan 16 2013 [↩]
- BII Report: Why Mobile Commerce Is Set To Explode, Business Insider, Jan 10 2013 [↩]
- Abercrombie & Fitch’s SEC filings [↩]
- Abercrombie & Fitch launches club loyalty promising, exclusive online photos and other content, Business Journal, Aug 15 2012 [↩]
- Abercrombie & Fitch Q4 fiscal 2012 earnings transcript, Feb 22 2013 [↩]
- Abercrombie & Fitch Q2 fiscal 2012 earnings transcript, Aug 15 2012 [↩]
- Abercrombie & Fitch Q3 fiscal 2012 earnings transcript, Nov 14 2012 [↩]
- Abercrombie & Fitch shares rise on expansion plans, Bloomberg Businessweek, April 3 2013 [↩]
- UAE has highest apparel spending per capita in the world, Emirate 24 7, June 8 2011 [↩] [↩]
- Apparel Retail in United Arab Emirates, Market Research, Feb 27 2013 [↩]
- Overview of the retail apparel market, United Arrows [↩]
- Japan ‘Super Cool Biz’ Campaign Urges Businessmen To Shed Suits, Save Energy, Huffington Post, Jan 8 2011 [↩]