Abercrombie & Fitch (NYSE:ANF) has faced trouble with its expansion strategies in the U.S. and international markets in the past, which has weighed on its comparable store sales growth. The retailer overexpanded its ANF brand in regions where demographics did not support its premium pricing. However, it has been shutting down its underperforming ANF stores in the U.S. to improve store productivity. In addition, troubled by the sluggish economy and self cannibalization in some markets, Abercrombie & Fitch is also slowing down its expansion in Europe. The company is now targeting the underpenetrated markets in the region for new store openings. This move should help it build a strong foundation for comparable store sales growth.
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Consolidation Of Abercrombie & Fitch Stores In The U.S.
Before the recession, Abercrombie & Fitch expanded its ANF stores in cities with relatively lower income demographics. This yielded unfavorable results as the retailer failed to attract sufficient store traffic. The economic downturn of 2008-2009 and fewer promotions also worked against the retailer. As a result, the number of transactions per ANF store (measure of store traffic) declined by 16% in 2008 and 14% in 2009. 
However, with the consolidation of underperforming stores and an improvement in economy, ANF stores started to recover.  The revenue per square feet surged from $365 in 2009 to $564 in 2012. In addition to this, EBITDA (earnings before interest, taxes, depreciation and amortization) per square feet also improved substantially from $51 in 2009 to $70 in 2011. We believe that Abercrombie & Fitch will continue with its consolidation strategy in the U.S. for the next few years which will further improve these figures. It appears that store consolidation is becoming a prominent trend in the U.S. apparel industry. Several apparel retailers such as American Eagle Outfitters (NYSE:AEO) and Limited Brands (NYSE:LTD) are following a similar strategy.
Controlled Expansion In Europe
International markets are important for Abercrombie & Fitch and contribute around 25% to revenues, but Europe has been particularly weak.  Driven by Europe’s weak economy and self-cannibalization, the retailer’s international comparable store sales decreased by 18% in Q3 fiscal 2012.  It’s hard to believe that the retailer is facing self-cannibalization with a small number of stores in Europe (only 78 stores as of fiscal 2011). This seems to be due to over-expansion in tourist locations and at local attractions, which has resulted in a concentration of stores in specific locations. 
However, the company’s management has announced that it will slow down its expansion in Europe. To expand in the region, it will target underpenetrated markets to negate the impact of cannibalization.  These efforts have started to show encouraging results as Abercrombie & Fitch witnessed an improvement in same store sales in Q4 fiscal 2012. 
We believe that Europe offers good market potential over the long run. Currently, it accounts for about 20% of the retailer’s revenues but only 7% of its total stores.  The European Commission predicts that the region’s economic growth will pick up slightly in 2013 which should help Abercrombie & Fitch’s recovery.  The weakness in Europe has also troubled other retailers such as Guess? (NYSE:GES) and Gap (NYSE:GPS) 
Our price estimate for Abercrombie & Fitch Stands at $51, implying a discount of about 10% to the market price.Notes:
- Abercrombie & Fitch’s SEC filings [↩] [↩] [↩] [↩] [↩]
- Abercrombie & Fitch Q2 fiscal 2012 earnings transcript, Aug 15 2012 [↩]
- Abercrombie & Fitch Q3 fiscal 2012 earnings transcript, Nov 14 2012 [↩]
- Abercrombie & Fitch Q4 fiscal 2012 earnings transcript, Feb 22 2013 [↩]
- Spring Forecast: towards a slow recovery, European Commission, May 11 2012 [↩]
- Companies’ SEC filings [↩]