Abercrombie & Fitch stock (NYSE: ANF) has declined by 35% since the beginning of the year. The apparel industry is rattled, and Abercrombie is no exception. Fading consumer demand, reduced discretionary spending, and stay-at-home orders resulting in store remaining closed continue to take their toll on the apparel industry. With JCPenney filing for bankruptcy protection, the very survival of retail companies has come into question. While bankruptcy doesn’t necessarily mean a company is going out of business, it definitely involves a massive financial restructuring.
Trefis analyzes the Impact Of The COVID-19 Recession On Abercrombie in an interactive dashboard with a focus on Abercrombie’s liquidity reserves and concludes that Abercrombie has a solid financial position and a COVID-19 recession will not materially impact the company’s cash reserves in FY2020. Although a COVID recession will impact the company’s revenues, cash flows, and ability to pay dividends, we believe the company has sufficient financial reserves to sail through this pandemic.
Impact On Abercrombie’s Revenues
- We estimate that a recession that persists through late Q3/early Q4 2020 can reduce the company’s revenues by 40% from $3.6 billion in 2019 to $2.2 billion in 2020.
- If the outbreak gets worse, Abercrombie will have to keep its stores closed until the situation improves. As a result, the company’s revenues could decline by about 40% in FY’20, on account of weaker demand, reduced mall traffic, potential supply constraints, and a reduction in discretionary spending.
- Even if the stores open, mall traffic is unlikely to return to pre-pandemic levels anytime soon.
- In addition to that, the company derives nearly 65% of its revenues from the US, which has been affected the most by the outbreak, with the country recording the largest numbers of COVID-19 cases across the globe.
Impact On Abercrombie’s Cash Flows
- Abercrombie’s cash flows are likely to fall in FY2020 due to a steep reduction in revenues and a hit to profitability.
- The company will have to offer merchandise at a deep discount to clear out the existing inventory.
- Elevated fixed costs, coupled with lower revenues, will hurt the company’s bottom line.
- However, Abercrombie has taken a number of measures to mitigate the impact on its cash balance by raising $210 million under its asset-based revolving credit facility and withdrawing about $50 million from its overfunded trust assets.
- Additionally, the company has suspended share repurchases and is unlikely to pay dividends.
Despite these measures, we estimate that Free cash flow from operations (FCFO) will go down from $300 million in 2019 to just around $20 million in 2020. Also, with expected capital expenditures of $100 million for the year, FCFO-CapEx will be -$82 million in 2020.
Cash Balance Impact
- Taking all these factors together, we estimate that A&F will end the year with a cash balance of $1 billion – higher than the figure at the end of 2019.
- This figure includes $265 million, which Abercrombie has raised from external sources.
- While the decision to stop share repurchases may be a disappointment for existing investors, these moves by the company are essential for its long-term survival.
To sum things up, Abercrombie can successfully weather a recession through Q3/Q4 and a 40% decline in revenues by cutting Capex, share repurchases, suspending dividends, and raising $265 Million in the capital. For an alternative scenario with a 25% change in revenue, see our full analysis about the impact of COVID recession on Abercrombie & Fitch.
Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.
While Abercrombie is looking solid, a recession could wipe off more than $1 billion from peer Gap’s cash reserves.