10% Upside to A&F’s Stock From Push into Lingerie Market?

Abercrombie & Fitch (NYSE:ANF) is a specialty retailer that derives most of its revenues from its Abercrombie & Fitch and Hollister brands where it competes primarily against brands from Gap (NYSE:GPS), American Eagle (NYSE:AEO) and Urban Outfitters (NYSE:URBN).

A&F also has two smaller brands, ‘abercrombie’, that offers casual luxury apparels for children in the age group 7-14 years, and ‘Gilly Hicks’, that offers intimate apparel for women, primarily in the age group 18-24 years.

We estimate that Gilly Hicks & abercrombie stores together constitute 14% of the $53 Trefis price estimate for Abercrombie & Fitch’s stock.  The company launched its Gilly Hicks collection of intimate apparels in 2007 as it believes that there is a significant opportunity in the lingerie market for young adult women.

Although we expect A&F to benefit from the growth in the US lingerie market, we believe that the long-term upside for A&F’s stock from the Gilly Hicks brand is limited to about 10% of our $53 Trefis price estimate for A&F’s stock.

Lingerie Market Set to Grow at 2% Annually Through 2016

The US lingerie market, estimated at around $9 billion in 2009, is expected to grow at an annual growth rate of about 2% from 2009 to 2016, adding nearly $190 million revenue to the market each year.   Some of this incremental growth is attributable to growth of lingerie spending amongst younger women (college and high school demographic).

The lingerie market is facing fragmentation as A&F and competitors like American Eagle Outfitters enter this lucrative market.  The increased competition is a change from the 1980s and 90s, when Limited Brands’ (NYSE:LTD) Victoria’s Secret had most of the market to itself.

Gilly Hicks vs. Victoria’s Secret’s

A&F is marketing its Gilly Hicks brand primarily to the 18-24 year old demographic.  A significant portion of A&F’s customer base is high school and college-aged customers, and A&F is looking to help retain part of this customer base through lingerie products.  This is likely to come at the expense of brands like Victoria’s Secret which have traditionally catered to an older demographic, but are also pushing towards younger customers (e.g. Victoria’s Secret PINK targeting college-age demographic).

Increase In Number of Gilly Hicks Stores Provides 10% Upside To A&F’s Stock

The company currently operates 16 Gilly Hicks stores, and is looking to aggressively expand this brand to become an 800 store chain in the long term. We expect the company, on an average, to add 20-25 Gilly Hicks stores each year.

This would mean that $40-50 million worth of incremental revenues will be generated by the Gilly Hicks brand each year from 2009 till the end of Trefis forecast period, if the Revenue per Square Feet and Sqaure Feet per Store for this brand were to increase according to our forecasts.

This indicates that the company has the potential to capture around 20-25% of the incremental revenues generated in the lingerie market, each year between 2009 and 2016.  You can modify the forecast below to see how there could be 10% additional upside to estimate for A&F’s stock if the company were to reach 800 Gilly Hicks stores in operation by the end of our forecast period.

You can see our complete $53 Trefis price estimate for Abercrombie & Fitch’s stock here.