Over the past few years, Abercrombie & Fitch (NYSE:ANF) has been aggressive with its expansion in European markets even though the demand was questionable. Due to the impact of the economic weakness and self-cannibalization, the retailer has struggled in the region. The company is facing issues of self-cannibalization despite a low store count (108 as of 2012) due to over-expansion in tourist locations and at local attractions, which has resulted in a concentration of stores in specific locations.  However last year, the company finally decided to slow down its expansion in Europe and target only under-penetrated markets. The importance of European markets for Abercrombie’s business is evident from the fact that the retailer earns close to 20% of its revenues from Europe but has only 7% of its store fleet there.
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The U.K., Germany and Spain are three of the biggest markets for Abercrombie in Europe with a total of 73 stores.  In this analysis, we’ll take a look at what these markets have in store for the retailer and how it should approach its expansion there. While unfavorable economic headwinds still impact the U.K.’s apparel market, its large size and positive growth forecast looks favorable for Abercrombie. Germany is the largest apparel market in Europe and holds good growth potential for apparel retailers. In contrast, Spain is a small and shrinking apparel market that may not be the best expansion option for Abercrombie in the present scenario.
Our price estimate for Abercrombie & Fitch stands at $40, implying a premium of about 15% to the market price.
The U.K. Is A Growing Market
Due to low disposable income, high promotions and changing shopping trends, the apparel market in the U.K. witnessed only marginal growth in 2012.  Shopper’s not only lowered their spending on apparel products but also started buying clothing and footwear that can be used for multiple occasions. However, the market remains large at around $59 billion and has seen positive growth for the past four years despite the economic downturn. Growth is likely to accelerate going forward fueled by growing online retail sales. The U.K. apparel market is expected to grow at a compound annual growth rate (CAGR) of 3% through to 2017, which will bring it to $96 billion. 
Lately, a number of brands in the U.K. have focused on multi-channel retailing by primarily targeting e-commerce as a channel. They have been updating their websites to handle more traffic and make shopping experience more convenient.  This move makes sense given that about 72% of adults used the Internet for shopping in 2013, compared to the 53% figure in 2008. Moreover, Internet access through mobile devices has doubled over the last three years. 
Growing brand promotions through social media channels and the launch of new product portfolios are likely to have a positive impact on the apparel market. As of 2012, Abercrombie operated 37 stores (out of 108 in Europe) in the U.K., which makes it the biggest European market for the retailer.  The company has opened about 9 stores on average during the last three years, and it should continue to expand at a moderate pace going forward.
Germany Is The Biggest Apparel Market In Europe
Although Germany’s apparel sales growth has been slow, it still remains the largest apparel market in Europe with annual sales of more than $75 billion (2009).  Moreover with an improving economic scenario, we expect the market to grow steadily going forward.  With their ability to keep up with changing fashion, major players such as Hennes & Mauritz, and Zara Deutschland achieved strong results in 2011, despite the tough economic environment. Moreover, several retailers are increasingly switching to celebrity endorsements to promote their collections and boost their sales. 
The biggest positive of the German apparel industry is the robust growth of online apparel retail, which has emerged as the most dynamic channel. This can be attributed to the fact that the proportion of Internet users in the region’s population is high at 84%.  Going forward, online apparel industry is likely to sustain its momentum as Forrester forecasts online sales in Europe to grow at a compounded annual growth rate of 11% for the next few years. It also expects e-commerce sales to take up a significant portion of retail sales in Germany over the long term. 
Abercrombie operated about 23 stores in Germany at the end of fiscal 2012 and all of them were opened during the last four years.  Since the company is young in the region, it should expand at a healthy pace to take advantage of the market potential.
Spain Does Not Appear To Be A Viable Expansion Option
Spain is still a small apparel market in Europe with annual sales of close to $20.4 billion. Moreover, it has witnessed negative growth (-5.4% CAGR) over the past four years and is not likely to recover in the near future due to the prevailing economic crises.  In the second quarter of 2013, while Germany and France registered strong economic growth, the Spanish economy shrank by 0.1%.  Moreover, it remained flat during the third quarter.  Due to the weak economic environment, Spanish buyers have become extremely value conscious as they are looking for a balance between price and quality.  A number of apparel players in the region have launched large promotional campaigns to respond to this trend. As a result, factory outlets and urban outlets have become very popular among Spanish buyers. 
Although branded retailers are gaining market share and apparel prices have somewhat stabilized over the past year, Spain does not appear to be the best European market at the moment. Abercrombie currently operates 13 stores in the region and we believe that it should not expand aggressively. Instead, it can divert its resources to other lucrative markets such as the U.K., Germany and Russia.Notes:
- Abercrombie & Fitch Q2 fiscal 2012 earnings transcript, Aug 15 2012 [↩]
- Abercrombie & Fitch’s SEC filings [↩] [↩] [↩]
- Apparel in the United Kingdom, Euromonitor International, Aug 2013 [↩] [↩]
- United Kingdom – Apparel, Accessories & Luxury Goods, Datamonitor Research Store, Mar 12 2013 [↩]
- Internet Access – Households & Individuals, 2013, Office For National Statistics, Aug 8 2013 [↩]
- Germany: Clothing Industry Guide, Research And Markets, Mar 2011 [↩]
- Germany, France haul euro zone out of recession, Reuters, Aug 14 2013 [↩] [↩]
- Apparel in Germany, Euromonitor International, Apr 2012 [↩]
- Internet Users, The World Bank [↩]
- U.S. Online Retail Sales To Reach $370B By 2017, €191B In Europe, Forbes, Mar 14 2013 [↩]
- Apparel Retail In Spain, Research And Markets, Feb 2013 [↩]
- Euro Zone Q3 GDP Preview: Recovery Lacks Momentum As Growth Slows In Germany, France, International Business Times, Nov 12 2013 [↩]
- Apparel in Spain, Euromonitor International, Jul 2013 [↩] [↩]