VALUATION HIGHLIGHTS

1. Abercrombie & Fitch Stores constitute 50% of the Trefis price estimate for Abercrombie & Fitch Co.'s stock.
2. Hollister Stores constitute 42% of the Trefis price estimate for Abercrombie & Fitch Co.'s stock.

WHAT HAS CHANGED?

1. ANF Tops Q2 2024 Estimates

The teen basics retailer's second-quarter revenue jumped 21% year-over-year (y-o-y) to a record high of $1.1 billion which was in line with analysts' expectations. A 26% jump in the company's namesake brand sales was helped by a 17% gain in its Hollister brand sales. The company posted adjusted net earnings of $2.50 per share - beating the consensus forecast by a good 28 cents.

Note: ANF's FY'23 ended on February 3, 2024. Q2 FY'24 refers to the quarter that ended on August 3, 2024.

2. Guidance

For the full year, ANF lifted its sales and profit forecast. Management now sees sales increasing by 12-13% in 2024, compared to its prior projection of a 10% growth. The company also expects an operating margin of 14-15%, up from 14%.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

1. Hollister Stores' Revenue per Square Foot

Hollister Revenue per Sq Ft : Hollister stores' revenue per square dipped marginally to $602 in 2023 from $610 in 2021. Going forward, we expect Hollister stores to continue their expansion, and reach $761 in the long term, thanks to its updated product portfolio. The retailer's efforts to turn around its product portfolio should help it attract customers in the long run.

2. ANF EBITDA Margin

EBITDA Margin: ANF's EBITDA Margins grew from 13.9% in 2021 to 15.3% in 2023, driven by revenue and comparable sales growth in the Americas, EMEA, and APAC segments. If ANF can reduce the pressure on margins, such that it reaches 18% by the end of the forecast period, there could be a 10% upside to our price estimate.

BUSINESS SUMMARY

Abercrombie & Fitch is a specialty retailer that operates stores and websites selling casual sportswear apparel, including knitted and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products, and accessories for men, women, and kids under the Abercrombie & Fitch, Abercrombie kids, and Hollister brands.

SOURCES OF VALUE

Higher number of Hollister stores than Abercrombie & Fitch stores

Abercrombie & Fitch operates about 247 namesake stores globally, while it has roughly 518 Hollister stores (as of 2023), which are comparatively smaller in size. In the past, Abercrombie & Fitch stores generated better revenue per square foot as compared to Hollister, because it is a relatively expensive brand. This trend reversed in 2017. Consequently, having a significantly higher store count and a better revenue per square foot, Hollister contributes a higher value to the company.

Rapidly growing direct to consumer business

Internet revenues have increased substantially for the company in recent years, forming nearly one-third of the company's sales. The aggressive growth is expected to continue going ahead. With the anticipated growth in online apparel sales in the U.S., Abercrombie plans to take advantage of this growing segment, and the development of e-commerce channels and an omnichannel portfolio remains a high priority for the company.

KEY TRENDS

Consolidation of Abercrombie & Fitch stores in the U.S.

Abercrombie & Fitch is looking to reduce its U.S. store fleet to an optimal size, as it takes significant strides toward the development of an omnichannel platform. Also, with its top line under pressure, the company is relying on this strategy to defend its bottom-line growth. Abercrombie & Fitch has closed significantly more stores in the U.S. over the past three years than it has opened.

Scope For International Growth

While Abercrombie & Fitch 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 127 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 30 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.