How Has Abercrombie Managed To Return To Growth?

by Trefis Team
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ANF
Abercrombie & Fitch Co.
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Abercrombie & Fitch (NYSE:ANF) reported its fourth quarter earnings on March 7, easily beating consensus expectations – by 28 cents on earnings per share and by $30 million on revenues. This impressive performance is a far cry from FY 2016, when for the full year, the company reported a loss of 6 cents per share. The company undertook a massive rebranding initiative after parting ways with its former CEO in late 2014, moving away from the reputation it had built over the past decade. The company’s store count has been reduced, stores now have a smaller footprint, with larger fitting rooms, and are integrated with technology. The overpowering perfume, which filled the stores earlier, has also been modified to a fresher, cleaner fragrance. In order to better engage its customers, the company is also improving its social media presence. Additionally, Abercrombie has invested in loyalty programs and developing its direct-to-consumer and omnichannel capabilities. All of these steps have contributed to an improved top and bottom-line, while carrying on its strategic investments in marketing, DTC, omni-channel, and loyalty.

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.

Improving Economic Conditions Help Abercrombie

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 Urban Outfitters have also posted a recovery this year, spurred 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 towards the online space. These factors led to a reduced need for promotions, resulting in greater sales of full-price items and less pressure on margins. Highlights in the quarter included Hollister crossing the $2 billion mark in sales, Abercrombie returning to positive comps, record digital sales for all its brands, and the strong response to the launch of A&F on Tmall.

Strong Digital Sales Bode Well For The Future

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 remain relevant. Keeping this in mind, ANF has integrated its Abercrombie and kids websites and optimized it for mobile, payment, and tracking. Abercrombie claims DTC (direct-to-consumer) is its largest storefront, wherein it saw an 18% increase in comps, accounting for 34% of the company’s total revenues. Moreover, mobile plays a huge part in the digital growth, representing 70% of the total DTC traffic. The company has stated that the investments in this area are paying off, with a 14% improvement in conversion. Abercrombie’s digital store-centric capabilities such as purchase online, pick up in store have been driving traffic to stores and as a result, spurring the purchases and productivity within the store. 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.

Store Closures A Much Needed Step

Since 2010, over 400 stores have been closed, representing more than one-third of the company’s store count. Further, a significant number have been remodeled or downsized. In 2017, ANF closed 39 stores in the U.S. through natural lease expirations. Moreover, for 2018, 60 more closures are intended, in addition to converting roughly 40 Hollister stores into the new prototype format, including six which will be downsized. Additionally, with about 50% of the U.S. leases expiring by the end of FY 2018, the company has significant flexibility to find the right store count balance, and drive efficiency by remodeling or resizing the stores, renegotiating leases, or shuttering some. The company feels it can drive greater store productivity through an “enhanced store experience on a smaller footprint.” In theory, the company’s comparable sales should show an improvement when the unprofitable stores are closed down, particularly with a greater focus placed on the online segment.

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