Abercrombie & Fitch’s Shares Slump As Third Quarter Sales Remain Disappointing

by Trefis Team
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Abercrombie & Fitch Co.
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Specialty apparel retailer Abercrombie & Fitch (NYSE:ANF) has provided a business update, revising its full-year guidance down substantially. The company reported net sales for the October quarter were down 12% to $1.033 billion. It also stated that its comparable store sales declined by 14% during the third quarter of fiscal 2013. [1]

The company also announced that it will close all the remaining stand alone stores of its Gilly Hicks brand by Q1 fiscal 2014,  announcing restructuring charges to be posted with quarter-end results. However, it will continue to offer the brand through Hollister stores and direct-to-consumer channel.  Finally, the company guided to a low double-digit decrease in comparable store sales in the fourth quarter, lowering its full-year earnings guidance to $1.40 to $1.50 per share. Following the business update, Abercrombie’s shares fell by more than 10%. The company will report full results on November 21st.

Due to inventory management issues, a fickle teen customer base, and overall weakness in the U.S. apparel demand, Abercrombie has been struggling for the past few quarters. These negative trends clearly persist. The company has been hurt by fast-fashion and low-cost chains such as H&M and Forever 21, which have been taking away market share from traditional apparel retailers. Adding to these company-specific factors, U.S. buyers have scaled back their spending on discretionary products. Negative news may have driven away consumers as well.  Earlier this year, CEO Mike Jefferies stirred controversy by stating that the company targets “cool” kids and not plus sized customers. This had severely impacted the retailer’s brand image, and it appears to be taking some measures for damage control. Abercrombie stated that it will start providing larger sizes for women. [2]

Our price estimate for Abercrombie & Fitch stands at $40, implying a premium of about 20% to the market price. However, we will update our price estimate once the company comes out with its earnings.

See our complete analysis for Abercrombie & Fitch

What’s Impacting the Retailer’s Growth?

Pressured by the payroll tax hike, slow job growth, and higher gasoline and healthcare costs, U.S. buyers have spent less on discretionary products this year. U.S. shoppers have started diverting their spending to cars and housing to take advantage of low interest rates. Subsequently, they are holding back on other products such as apparel and electronics. As a result, several apparel retailers have relied on heavy markdowns to win back customers, which have weighed on growth and profitability. The Commerce Department stated that retail sales in August, excluding the automotive sector, increased by just 0.1%, which was significantly lower than the expected 0.4%. In September, the market growth remained slow as a number of retailers such as Gap Inc (NYSE:GPS), Zumiez Inc, The Buckle Inc and American Apparel Inc posted comparable store sales declines. [3] Moreover, warmer than usual weather in October impacted the demand of fall products and cool-weather apparel.

Within the market, Abercrombie has been losing its customers to fast-fashion operators such as Zara, Forever 21 and H&M. Since these competitors offer their products at affordable prices, shoppers have preferred them over relatively expensive Abercrombie. Moreover, with more desirable merchandise, they have the ability to quickly turnaround the latest fashion trends.  In contrast, Abercrombie has been unable to sell down its inventory at forecasted prices. ((Abercrombie promises more styles, sizes for women, Reuters, Nov 6 2013)) This still remains an issue for the company as it is offering heavy discounts to attain a clean inventory position for the holiday season. The holiday season this year is expected to see its slowest gains since 2009 on account of weak consumer spending. According to a Reuters poll, about 27% of the consumers are planning to lower their spending on apparel this holiday season. [4] Therefore, the holiday outlook for Abercrombie seems as grim as the company indicates.

Abercrombie’s New Strategies To Improve Performance

The Company Is Looking To Mend Its Brand Image

A few months back, the website Business Insider reported that Abercrombie does not offer XL, XXL and above-10 sizes for women. [5] Indeed, the company’s strategy had been to keep a firm focus on thin women in order to clinch a distinct position in the apparel market. However, this news shed a new light on Abercrombie’s CEO Mike Jeffries’ long standing strategy to exclusively target slimmer, better looking and popular “cool kids”. Once revealed, the strategy was perceived  to be offensive to a large number of consumers and the retailer has faced significant criticism in media. In response to this, Mr. Jeffries retracted his comments and apologized for his choice of words. [6] Since the company is now struggling with growth, it is looking to revamp its product portfolio by providing plus-size clothing. If Abercrombie is able to mend its brand image and expand its customer demographic, there can be some positive impact on its growth. However, we do not expect the company to benefit from this strategy in the near-term.

It Is Closing Gilly Hicks Stores

Abercrombie launched Gilly Hicks in January 2008 as a chain focused on under garments and sleep ware.  It has about 20 stores operational in the U.S. and 8 stores in international markets. [7] The company has now decided to close all the free standing locations of the chain, though it will maintain the brand.  The new retailer was not delivering desired results. Gilly Hicks operates in a highly competitive market with a large number of already established players such as Victoria’s Secret, Aerie and Frederick’s of Hollywood. Moreover, Gilly Hicks is a rather expensive brand and it often confused its customers with an elaborate and amusement-park-like store design. [8] The company stated that the closure is a part of its long-term strategy as it can divert its focus and resources to its core brands. Abercrombie believes that Gilly Hicks as a brand can be better developed through Hollister stores and the direct-to-consumer channel. [1]

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Notes:
  1. Abercrombie & Fitch Provides Business Update Announces Restructuring Plan For Gilly Hicks Brand Amends Credit Agreement, Abercrombie & Fitch, Nov 5 2013 [] []
  2. Abercrombie promises more styles, sizes for women, Reuters, Nov 6 2013 []
  3. U.S. retailers’ September sales rise modestly, shoppers wary, Reuters, Oct 10 2013 []
  4. U.S. holiday sales expected to rise less than last year: ShopperTrak, Reuters, Sept 17 2013 []
  5. Abercrombie & Fitch Refuses To Make Clothing For Large Women, Business Insider, May 3 2013 []
  6. Abercrombie & Fitch’s big, bad brand mistake, The Washington Post, May 22 2013 []
  7. Abercrombie to close its Gilly Hicks stores, The Columbus Dispatch, Nov 6 2013 []
  8. Three Mistakes That Are Driving Abercrombie & Fitch Into The Ground, Business Insider, Nov 6 2013 []
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