A&F’s Earnings Preview: Weak Industry Trends Could Hurt Results

August 19th, 2013 by Trefis Team
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ANF: Abercrombie & Fitch logo
ANF
Abercrombie & Fitch

Abercrombie & Fitch (NYSE:ANF) hasn’t done too well in the recent quarters due to weak inventory management. It has been struggling to maintain optimum stock levels as its inventories have fluctuated from one end to the other. While the company went through most of fiscal 2012 trying to clear the surplus stock in its warehouses, its inventory levels dipped too low in the first quarter. As a result, comparable store sales declined by 5% and 17% in fiscal 2012 and Q1 fiscal 2013, respectively. When the company releases its Q2 fiscal 2013 earnings on August 22, we do not expect the scenario to be any different. This quarter has already been disappointing for apparel retailers due to a cooler spring season, weak consumer spending and a bleak start to the back-to-school season.

See our complete analysis for Abercrombie & Fitch

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Weak Market Conditions Will Drag Down The Sales

The spring season in the U.S. this year was reportedly the coldest since 1996, with average temperatures around 50.5 degree Fahrenheit. Moreover, the season turned out very wet with average precipitation 0.21 inch above the 20th century average. [1] These weather conditions resulted in low demand for clothing suiting warmer and drier climate, which impacted industry wide apparel sales during the period of May-March. Additionally, the consumer spending remained weak during the quarter due to high unemployment rate as the U.S. employers slowed their hiring pace outside the farming sector. [2] The worst affected was the teenage segment, where the unemployment rate rose to 23.7% in July. [3]

As a result, the beginning of the back-to-school season (July), which is the second most important season for apparel retailers, was quite weak. According to the National Retail Federation, average spending per family on apparel, shoes, supplies and electronics will decline by almost 8% during this season compared to 2012. [4] This can be attributed to last year’s record back-to-school season spending and cautious consumer spending this year on the account of payroll tax increase. Overall, the second quarter was disappointing for a number of retailers including Aeropostale (NYSE:ARO) and American Eagle Outfitters (NYSE:AEO), and Abercrombie will be no different.

Additionally, the apparel industry saw heavy markdowns in July as retailers were looking to enter the third quarter with low inventory carryover. [2] Since Abercrombie has already had a torrid time with its inventory management, this was a crucial period for the retailer. We believe the company to have undertaken large scale promotions to prevent inventory hangover. Due to these reasons, positive revenue growth for Abercrombie is unlikely.

Bad Press Will Not Help

Negative headlines have recently dogged Abercrombie after it was pointed out that the company does not offer XL, XXL and above 10 sizes for women. [5] Also, a statement made by Abercrombie’s CEO Mike Jeffries in a Salon article back in 2006 has come back to haunt the company. Jeffries had stated that he exclusively wanted to target slimmer, better looking and popular “cool kids,” as his business was mostly about sex appeal. [5] The company faced significant media criticism and protest for these offensive remarks. Its strategy was mocked in The Ellen DeGeneres Show recently and its Facebook (NASDAQ:FB) page has been stormed with negative comments. [6] A video featuring a person donating Abercrombie clothes to a homeless man and photos of a plus sized blogger in Abercrombie’s suggestive ads have gone viral over the Internet. [7] [8] Although Mike Jeffries has apologized for his choice of words, the damage to the brand’s image is done. [6]

Abercrombie is also under an investigation by France’s human rights watchdogs under the suspicion that it hires store staff on the basis of physical appearance. [9] The negative media can hurt Abercrombie’s brand image and impact the demand for its apparel products.

Our price estimate for Abercrombie & Fitch stands at $49, which is slightly below the market price.

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Notes:
  1. Spring 2013 Recap: Cool temperatures dominate the U.S., Climate.gov, Jun 12 2013 [↩]
  2. Retailers boost July sales with heavy discounts, promotions, Reuters, Aug 8 2013 [↩] [↩]
  3. Teen Retailers Could Be In for Rough Back-To-School Season, The Wall Street Journal, Aug 6 2013 [↩]
  4. On heels of historically high back-to-school season, 2013 spending expectations decline, National Retail Federation, Jul 18 2013 [↩]
  5. Abercrombie & Fitch Refuses To Make Clothing For Large Women, Business Insider, May 3 2013 [↩] [↩]
  6. Abercrombie & Fitch’s big, bad brand mistake, The Washington Post, May 22 2013 [↩] [↩]
  7. Abercrombie & Fitch Gets a Brand Readjustment #FitchTheHomeless, YouTube, May 13 2013 [↩]
  8. To: Mike Jefferies, C/O Abercrombie & Fitch, The Militant Baker, May 19 2013 [↩]
  9. French Watchdog probes Abercrombie for discrimination, Reuters, Jul 24 2013 [↩]