How Did Abercrombie Fare In Fiscal 2018?

by Trefis Team
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ANF
Abercrombie & Fitch Co.
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Abercrombie & Fitch (NYSE: ANF) recently posted its fourth quarter earnings. The apparel retailer’s revenue rose 3% annually to $3.6 billion, marking the sixth consecutive quarter of positive comparable sales with continued gross margin stabilization. The company reported its highest net profit in six years, benefiting from tax reform, reducing its effective tax rate to 32% (from 81% in 2017). Fiscal 2018 saw the Hollister brand achieving 5% comparable sales growth while annual digital sales exceeded $1 billion, driving overall revenue growth for the company.

We expect Abercrombie to build on its solid performance in 2018, as the company remains focused on its twin objectives of optimizing store networks and enhancing its digital presence and omni-channel capabilities. However, the company faces a challenge to revamp its underperforming Abercrombie brand. Also, the appreciating dollar is likely to adversely impact the company’s top line in terms of its international operations. We currently have a price estimate of $29 per share for ANF, which is slightly ahead of the current market price. We have summarized our full year expectations for the company based on management’s guidance and our own estimates, on our interactive dashboard ANF’s 2018 Financial Outlook. You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Consumer Discretionary Services company data here.

Key Takeaways from Abercrombie’s Fiscal 2018 Earnings are Summarized Below:

Digital Sales Continue To Augment The Company’s Growth

Growth in e-commerce highlights the fundamental shift from brick-and-mortar to the online platform, and retail companies have to embrace this trend in order to remain relevant. To put things in perspective, digital and in-store shopping are becoming increasingly integrated by the day. ANF has invested heavily in growing its Direct to Consumer (DTC) segment, as the company shifts its focus to digital sales as opposed to physical store sales. The company’s strategy is bearing fruit, as evidenced by the fact that digital sales exceeded $1 billion in 2018 to constitute approximately 35% of total sales volume. Pick up in store facility – a part of the DTC initiative – also saw revenues surge in fiscal 2018. ANF achieved a 30% digital penetration in its omnichannel and DTC program in 2018. We anticipate the DTC segment to be the driving force of revenue for the company in the coming years.

Store Optimization Program

ANF has been remodeling, resizing and relocating its brick and mortar stores. ANF’s store count has also gone down from a peak of 1100 to 861 in 2018, as the company is going towards a smaller format and mall-based locations stores and focusing more on local consumers and digital sales. The company plans to close down another 40 stores in 2019 and approximately 50% of U.S. stores are up for renewal in 2019, giving the company the flexibility to close or remodel its existing stores. Closing unprofitable stores has helped the company to increase its per square foot revenue, thereby increasing its profitability.

Company Seeks To Leverage Its Loyalty Program

Abercrombie’s loyalty program grew significantly in 2018, with its total member count reaching 28 million. The company plans to leverage the data of the loyalty program to better engage with its customers on a personalized level, which in turn will help the company to improve its customer retention ratio. We expect the company to further invest in this program and improve its customer engagement across markets.

Macroeconomic Outlook

We expect strong tourism and macro environment in Europe to drive Abercrombie’s overall growth in international markets. The company’s operations also grew in China, where it saw a strong performance on Singles’ Day. While China’s retail segment is expected to grow, the company plans to reduce production in China to 20% in 2019, as greater uncertainty with respect to trade policies, tariffs and government regulations is likely to adversely impact trade between the U.S. and China.

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