Abercrombie & Fitch Preview: Soft Quarter Likely But Online Sales Should Help
Quick Take
- Abercrombie & Fitch is scheduled to release its Q1 fiscal 2013 earnings on May 24.
- Despite the unusually long winter that led to lower demand for spring clothing, the retailer will see moderate growth in comparable store sales driven by its efforts to attract customers and improve its average prices. Abercrombie’s direct-to-consumer business will remain the key growth driver in this quarter.
Abercrombie & Fitch (NYSE:ANF) will release its Q1 fiscal 2013 earnings on May 24. March 2013 was particularly weak for apparel sales in the U.S. as the prolonged cold impacted the demand for spring clothing. However, Abercrombie’s efforts to engage customers with its loyalty club and improve its average pricing through tighter inventory management should help offset the negative impact. As a result, we expect the retailer’s comparable store sales growth to remain moderate this quarter. Continuing the recent trend, the direct-to-consumer segment is likely to remain the key growth driver as buyers continue to shift to online shopping.
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See our complete analysis for Abercrombie & Fitch
Efforts To Attract Customers Should Help
Last quarter, Abercrombie initiated its first global market research study to better understand customers and competitors in different markets such as North America, Europe and Asia. [1] It also launched a loyalty club program for its ANF brand last year that offers discounts, gift certificates and other rewards. It provides free shipping for online orders and access to exclusive music videos and photo galleries on its website.
In the initial stages of this program, more than 750,000 customers signed up and started buying more than the regular customers. Towards the end of the fourth quarter, this figure increased to more than 1.5 million. This is in addition to 3.5 million existing customer contacts. Such programs will help Abercrombie in keeping the customers interested in its brands, which will ultimately reflect in revenue growth. [1]
In addition, the company is also seeing gains from its social media presence. We believe that leveraging social media sites such as Facebook and Twitter can lead to better customer engagement that will help drive sales.
Growth In Direct-To-Consumer Business Will Aid The Results
Online apparel sales in the U.S. have grown at a rapid pace due to growing Internet usage and the proliferation of smartphones and tablets. Major players such as Urban Outfitters (NASDAQ:URBN), American Eagle Outfitters (NYSE:AEO) and Gap (NYSE:GPS) have thrived due to this trend and Abercrombie is no different. [2] The table below shows how the retailer’s direct-to-consumer revenue growth has trended over the past few years. [3]
| Year -> | 2010 | 2011 | 2012 |
| Direct-to-consumer Revenues ($Bil) | 0.41 | 0.55 | 0.70 |
| % Growth | 39.6% | 36.4% | 26.8% |
We expect the growth to continue this quarter as well due to the positive outlook of e-commerce in the U.S. Back in 1999, online apparel sales in the U.S. constituted only 0.05% of total apparel sales. This figure increased to 1.5% in 2009. [4] Since the proportion is still low, there exists huge growth potential for the online apparel retail business.
The direct to consumer segment accounts for about 40% of the company’s value, according to our estimates.
Improving Average Unit Retail Should Help Comparable Store Sales
Abercrombie has faced difficulty in managing its inventory in the past. This resulted in excessive promotional discounts leading to a decline in average unit retail (average price per unit). This not only impacted the retailer’s comparable store sales but also weighed on its margins. Last quarter, the company created a cross-functional team with a senior level leader to specifically work on identifying ways to improve average prices. [1] The most important factor on this front is inventory management. If Abercrombie can maintain proper inventory levels, it can operate with fewer promotional discounts, leading to an increase in average price per unit.
Abercrombie is looking to increase its inventory at a much slower pace than its sales growth. Low carryover of fall inventory in Q4 fiscal 2012, and 35% lower inventory (as compared to Q4 fiscal 2011) at the end of the same quarter were indicative of this effort. [1] This helped Abercrombie in reducing the number of markdowns and improve its margins. The retailer is also increasing its vendor collaborations to utilize its supply chain expertise during the product development cycle, which will help in the timely delivery of merchandise. [1] Overall, this should lead to an increase in full priced sales which should boost its average unit retail (AUR). With Abercrombie’s continued efforts on this front, we expect to see moderate comparable store sales growth despite the unfavorable impact of the prolonged cold weather.
Our price estimate for Abercrombie & Fitch stands at $51, implying a discount of 5% to the market price.
Notes:- Abercrombie & Fitch Q4 fiscal 2012 earnings transcript, Feb 22 2013 [↩] [↩] [↩] [↩] [↩]
- Companies’ SEC filings [↩]
- Abercrombie & Fitch’s SEC filings [↩]
- Calculated using the data available with United States Census Bureau [↩]