Is Abercrombie & Fitch Set For A Strong End To FY 2017?

by Trefis Team
Abercrombie & Fitch Co.
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The movement of Abercrombie & Fitch’s (NYSE:ANF) stock price in 2017 is reflective of its changing fortunes. While the stock had been doing pretty poorly in the first half of the year, its upward trajectory started a few days prior to its second quarter results announcement in August, buoyed by the broadly positive reports delivered by other teen retailers. The company itself beat consensus expectations on both revenues and earnings in the second and third quarters. The impressive performance in the third quarter was shored up by the 4% comparable sales growth for the company, which thumped the 0.3% gain expected. The shift towards online and fast-fashion stores has hit a number of teen-retailers, including Abercrombie. In response to this, the company has implemented a bevy of changes to turn around its fortunes and revamp its image. While the teen apparel retailer had expected a strong holiday quarter, with comps slated to increase in the low single digits, the company managed to exceed this prediction, with the metric now expected to be up high-single digits. Moreover, the net sales are now expected to be up low-teens, compared to the previous outlook of up mid- to high-single digits.

The improvement in ANF’s performance, however, cannot be attributed to company-specific factors alone, as it is not the only player in the retail industry that has shown strength in recent months. Companies such as Gap and Abercrombie & Fitch, which were assumed close to dead, have posted a recovery this year, spurred on by an improving economy. With unemployment rates at their lowest levels since February 2001, and consumer confidence on a high, the retail sector was bound to be a beneficiary. Moreover, apparel companies have made a considerable effort to rid themselves of excess inventory, and undertaken store closures to better optimize their footprint with a move seen towards the online space. These factors aided in a reduced need for promotions, resulting in greater sales of full-price items and less pressure on margins. Below we’ll highlight some factors that we feel will help ANF improve its revenues going forward.

We have an $18 price estimate for Abercrombie & Fitch, which is below the current market price. The chart below has been made using our new, interactive platform. You can click here to modify the driver assumptions to gauge their impact on ANF’s valuation and price per share metric.

1. Direct-To-Consumer (DTC) Segment

One avenue of long-term growth is the company’s online business. A fundamental shift from brick-and-mortar to the online platform is evident, and retail companies have to embrace this trend in order to be relevant. Keeping this in mind, ANF has integrated its Abercrombie and kids websites and optimized it for mobile, payment, and tracking. The company reported an 11% growth in this segment in the third quarter, with a majority of the growth coming from mobile. This implies that the company’s significant investments into mobile are paying off, as more than two-thirds of the DTC traffic comes from this platform. Abercrombie’s digital store-centric capabilities such as purchase online, pick up in store, which witnessed a 75% growth in the quarter, have been driving traffic to stores and, as a result, been spurring the purchases and productivity within the store. DTC has grown to 24% of the company’s business, up from 23% last year. The company has a robust omnichannel functionality in markets such as the US, Canada, and the UK. These capabilities are being introduced in its other markets as well, which is a necessary area of focus for driving international growth.

2. Hollister

Hollister has continued to perform strongly amid a tough retail environment. The brand built on the momentum it had gathered in the past few quarters, growing its comps by 8% in the third quarter. While A&F’s comps are improving sequentially, they are still in the negative territory. As can be seen in the chart below, the third quarter of FY 2016 seems to be the turning point for the comps. While Hollister’s recovery started in the quarter prior, for the namesake brand and the whole company, the comps have trended better since Q3. Changes to the assortment have been a factor driving the growth at Hollister, as well as its lower-priced products as compared to A&F. Its Club Cali loyalty program continues to do well, and attract new customers. The program has grown to over 8 million customers by the quarter-end, who get to make use of the member-only events.

3. Online Partnerships

Abercrombie has partnered with online retailers such as Zalando and Zalora, to get access to their customer base in Europe and Southeast Asia, respectively. Since every sale through these websites will be additional revenue, without any fixed costs associated, it may have a positive impact on the margins. The company is also not that heavily present in these regions, and hence, a presence on the websites will not result in cannibalization. The company last quarter also launched Abercrombie & Fitch and Abercrombie Kids on Alibaba’s Tmall platform. The success of Hollister on this platform for the past three years prompted ANF to showcase its other brands as well, and helps to leverage the strong digital growth in China.

4. Intimates & Swimwear

Victoria’s Secret’s loss seems to be A&F’s gain. The former discontinued its swimwear line, and has suffered from a comps decline ever since. Abercrombie, on the other hand, witnessed aggressive growth in its Swim and Intimates line, with Gilly Hicks continuing to attract new customers to the Hollister brand. The Gilly Kicks brand was relaunched globally in the beginning of 2017, and seems poised for success in the future. Even for American Eagle, its lingerie and activewear brand, Aerie, has been its best performing segment for a while now, demonstrating the tremendous growth in this field.

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