Positive Economic Conditions And Strong Digital Sales To Drive Revenue Growth For Abercrombie

by Trefis Team
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Abercrombie & Fitch Co.
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Abercrombie & Fitch’s (NYSE:ANF) impressive performance in FY 2017 was 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 developed its direct-to-consumer and omnichannel capabilities. All of these steps have contributed to an improved top and bottom-line. The company is set to report its first quarter results on June 1, wherein, although the earnings are still expected to be in the red, an improvement in the metric is expected, along with a 5% rise in revenues.

We have a $26 price estimate for Abercrombie & Fitch, which is slightly higher than the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard to modify the driver assumptions to gauge their impact on ANF’s revenue, EBITDA, or price per share metrics.

Factors That May Impact The Quarter’s Performance

1. Latest Thomson Reuters Same Store Sales (SSS) Index: Analysts polled by Thomson Reuters are increasingly bullish on consumer spending in the wake of strong holiday sales, which they feel has continued into the first quarter. The Thomson Reuters Same Store Sales Index has shown a stronger comparable sales growth in Q1 2018 versus Q1 2017. Besides improving consumer confidence, retailers can also be expected to benefit from easier comparisons, given a weak first quarter last year.

2. Higher Retail Sales: According to the U.S. Census Bureau, retail sales were up 4.7% in April. Categories with strong growth included clothing/clothing accessories, which rose 4.1% as compared to the previous year, a factor that should bode well for apparel retailers. Macy’s, which posted its first quarter results recently, reported strong consumer spending as a factor that resulted in the company raising its full year earnings guidance. This should put the confidence back into the retail industry. Moreover, even Urban Outfitters posted stellar earnings, which bodes well for a company like Abercrombie.

3. Strong Digital Sales: 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. In this regard, ANF has ensured local and regional fulfillment capabilities across the U.S. and around the globe, as well as supporting 20 websites and 4 apps in 11 local languages. ANF has made a considerable investment, of roughly $400 million since 2010, to ensure the growth of its DTC (Direct To Consumer) segment, and has been rewarded as a result. DTC is now its largest storefront, and constitutes 28% of the company’s sales volume and represented $1 billion in order volume last year. Moreover, mobile plays a huge part in the digital growth, representing 70% of the total DTC traffic. To better serve the customer’s needs, ANF has been evolving its omnichannel capabilities. Abercrombie’s digital store-centric functionalities 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 also introduced reserve-in-store that enables customers to try before buying, order-in-store, which displays all of the inventory to customers shopping in the stores, and ship-from-store, which enables ANF to maximize its inventory. These efforts should ensure a sustained growth in digital sales.

4. Store Closures: 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 60% of the U.S. leases expiring by the end of FY 2019, 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. Furthermore, the revenue per square foot should increase with stores being downsized.

5. Scope For International Growth: While the company has been focusing on right-sizing its store footprint in North America, it is dependent on the international markets for growth through expansion. In Europe, the company sees a $1 billion opportunity across all channels. At present, the company has a modest 117 stores in the region. Consequently, its focus in the region is on increasing penetration, shifting to smaller, more productive stores, and building a more local customer base. The company’s partnership with wholesalers, like ASOS, NEXT, and Zalando, should ensure online sales growth. In China, the company estimates a $500 million opportunity. The company currently has only 28 stores in the country, and is focusing on growing its digital business, through its partnership with Alibaba, as well as its store count to address this opportunity.

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