How Can The U.K. And Germany Augment Abercrombie & Fitch’s European Business?

Over the past few years, Abercrombie & Fitch (NYSE:ANF) has been aggressive with its expansion in European markets even though the demand has been questionable. Due to the impact of economic weakness and self-cannibalization, the retailer has struggled in the region. The company is facing issues of self-cannibalization despite a low store count (110 as of 2012) due to over-expansion in tourist locations and at local attractions, which has resulted in concentration of stores in specific locations. However in 2012, the company finally decided to slow down its expansion in Europe and target only under-penetrated markets.

The importance of European markets for Abercrombie’s business is evident from the fact that the retailer earns close to 20% of its revenues from Europe but has only 7% of its store fleet there. The U.K. and Germany are two of the biggest markets for Abercrombie in Europe with a total of 60 stores (2012). In this analysis, we’ll take a look at what these markets have in store for the retailer. While unfavorable economic headwinds still impact the U.K.’s apparel market, its large size and positive growth forecast look favorable for Abercrombie. Germany is one of the largest apparel market in Europe and has seen stable growth in the recent past, despite the uncertain economic environment. Germans have been buying high quality fashion products from popular brands, which bodes well for Abercrombie’s growth.

Our price estimate for Abercrombie & Fitch stands at $39.72, which is 10% above to the current market price.

See our complete analysis for Abercrombie & Fitch

The U.K. Market Growth Favors Abercrombie

Due to low disposable income, high promotions and changing shopping trends, the apparel market in the U.K. witnessed only marginal growth in 2012. ^[1] Shopper’s not only lowered their spending on apparel products, but also started buying clothing and footwear that can be used for multiple occasions. However, the market remains large at around $59 billion and has seen positive growth for the past four years despite the economic downturn. Growth is likely to accelerate going forward fueled by growing online retail sales. The U.K. apparel market is expected to grow at a compound annual growth rate (CAGR) of 3% through to 2017, which will bring it to $96 billion. ^[2]

Lately, a number of brands in the U.K. have focused on multi-channel retailing by primarily targeting e-commerce as a channel. They have been updating their websites to handle more traffic and make shopping experience more convenient. This move makes sense given that about 72% of adults used Internet for shopping in 2013, compared to only 53% in 2008. Moreover, Internet access through mobile devices has doubled over the last three years. ^[3] In addition, growing brand promotions through social media channels and the launch of new product portfolios are likely to have a positive impact on the apparel market. As of 2012, Abercrombie operated 37 stores (out of 110 in Europe) in the U.K., which makes it the biggest European market for the retailer.

Huge Market Potential And Success Of Fashion Brands In Germany Looks Promising

Although Germany’s apparel sales growth has been slow, it still remains one of the largest markets in Europe with annual sales of more than $75 billion. ^[4] Moreover, with rising consumer interest in high-end clothing, we expect the market to register some value growth going forward. In 2012, despite the sluggish economic environment and weak consumer confidence, the apparel market registered steady growth as consumers bought long-lasting high quality products from popular apparel brands. With their ability to keep up with changing fashion trends, major players such as Hennes & Mauritz and C&A Mode KG remained at the forefront of this growth. This trend is encouraging for Abercrombie as it is one of the most popular U.S. brands. Moreover, several retailers are increasingly switching to celebrity endorsements to promote their collections and Abercombie can also leverage this trend. ^[5]

The biggest positive of the German apparel industry is the robust growth of online apparel retail, which has emerged as the most dynamic channel. This can be attributed to the fact that the proportion of Internet users in the region’s population is high at 84%. ^[6] Going forward, online apparel industry is likely to sustain its momentum as Forrester forecasts online sales in Europe to grow at a compounded annual growth rate of 11% for the next few years. It also expects e-commerce sales to take up a significant portion of retail sales in Germany over the long term. ^[7] Abercrombie operated 23 stores in Germany at the end of fiscal 2012 and all of them were opened during the last four years. Since the company is young in the region, we might see better customer response in the future as the brand gains popularity.

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1. Apparel in the United Kingdom, Euromonitor International, Aug 2013 [↩]
2. United Kingdom – Apparel, Accessories & Luxury Goods, Datamonitor Research Store, Mar 12 2013 [↩]
3. Internet Access – Households & Individuals, 2013, Office For National Statistics, Aug 8 2013 [↩]
4. Germany: Clothing Industry Guide, Research And Markets, Mar 2011 [↩]
5. Apparel In Germany, Euromonitor, Sep 2013 [↩]
6. Internet Users, The World Bank [↩]
7. U.S. Online Retail Sales To Reach $370B By 2017, €191B In Europe, Forbes, Mar 14 2013 [↩]