Abercrombie & Fitch Plans To Add 100 Stores In China Over The Next Decade

Struggling with inventory problems and controversies in the U.S., Abercrombie & Fitch (NYSE:ANF) was a little late in realizing that China was a big potential market. While retailers such as Gap Inc (NYSE:GPS) and Guess (NYSE:GES) had tapped the opportunity a long time ago, Abercrombie entered the market in 2011 with three stores and added only four-five stores during the next two years. However, with the opening of its recent Shanghai flagship store, the company unveiled plans to expand in China with more than 100 stores over the course of next 10 years. ^[1]

With its huge size, rising disposable income and booming middle class, China has become a hub for western apparel retailers. Big American brands such as Gap, American Eagle Outfitters (NYSE:AEO) and Guess are looking to ramp up their expansion to take advantage of the growth opportunity. The region provides good potential for luxury as well as value-for-money brands, which makes it a lucrative market for Abercrombie. Although the retailer operates only a few stores in the region, they have performed exceedingly well so far. Chinese buyers have developed a liking for the brand that is likely to complement its expansion, which holds a potential upside of more than 5%.

Our price estimate for Abercrombie & Fitch stands at $39.72, which is 5% above to the current market price.

See our complete analysis for Abercrombie & Fitch

Abercrombie Is Following Gap Inc’s Footsteps

A few days back, Abercrombie opened its flagship store in Shanghai and laid out plans to open over 100 stores in China under its A&F and Hollister brands in the coming 10 years. In addition, the retailer is also planning to launch a local language online shopping channel later this year. The company’s senior VP of marketing believes that with good brand awareness, the laid-back sophistication of A&F brand can fulfill Chinese buyers’ longing for products beyond flashy luxury logos. ^[2] So far, Abercrombie’s stores in China have delivered promising results, posting an increase of 35% in comparable sales in 2013. ^[3]

Expansion in China has become somewhat of an inevitable move for U.S. apparel retailers and Abercrombie’s plans have come soon after Gap Inc indicated its intentions to expand aggressively in the region. During 2013, Gap Inc opened 30 new stores in China and entered four new cities, extending its presence to 21 cities in the region. We expect the company to open a greater number of stores this year considering that its brand awareness is close to 70% and it is yet to enter 29 cities with more than 5 million population. In addition, Gap Inc is planning to introduce its Old Navy brand in China this year and is also looking to bring its semi-luxury brand Banana Republic at a later stage. ^[4] Although China’s economic environment has been a little sluggish lately, it hasn’t discouraged retailers such as Abercrombie and Gap Inc.

China Is The Most Promising Apparel Market In The World

Fueled by rising disposable income and a flourishing middle class, the Chinese apparel market grew from $110 billion in 2009 to $140 billion in 2012, and is expected to touch $220 billion by 2016. ^[5] Moreover, online retail sales in China are expected to rise from $110 billion in 2012 to $440 billion in 2016, with apparel industry playing a crucial role. ^[6] As Chinese consumer confidence hasn’t been at its best lately, many buyers have switched to Internet shopping to capture additional discounts. Apart from propelling online sales, this has boosted unit price growth as customers usually end up buying more coaxed by attractive offers and wider product range. ^[7]

Over the past decade, disposable income in China has increased substantially driven by rising labor costs and improving lifestyle. An ageing Chinese population, labor shortage and government regulations are all contributing to the increasing labor costs. About 243 million Chinese are expected to be above the age of 60 by 2020, which will result in fewer people looking for work. ^[8] Also, the development of rural areas has encouraged the local population to look for work opportunities in their vicinity. This is preventing migration to urban areas, which is further adding to labor shortage. The younger generation increasingly prefers college over factory work, which reflects increased awareness of education and the opportunities it affords. Apart from fueling labor costs, this trend is likely to enhance the youngsters’ living standards and increase the demand for specialty apparel.

Abercrombie’s Expansion Plan Holds An Upside Opportunity

Over the past few years, Abercrombie has been downsizing its A&F brand network in the U.S. to consolidate its under-performing store fleet. The brand closed 22 domestic stores on average during the last five years, which brought the overall store count down to 275 in 2013 from 346 in 2009. While the company opened just four international A&F stores every year during 2010-2013, it added more than 28 Hollister stores on an average. However, assuming that Abercrombie opens equal numbers of A&F and Hollister stores in China going forward, we can see 25-30 additional stores for both brands in the next-five six years. Also, the upcoming China-specific e-commerce website is likely to bring in some incremental revenues. Making these adjustments in our pricing model, we get more than 5% upside to our price estimate for Abercrombie.

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1. Abercrombie & Fitch plans over 100 new stores in China, China Daily, Apr 19 2014 [↩]
2. Abercrombie & Fitch aims to open 100 stores in China, Fashion United, Apr 23 2014 [↩]
3. Abercrombie & Fitch’s Q4 fiscal 2013 earnings transcript, Feb 26 2014 [↩]
4. Gap Plans to Expand in China, The Wall Street Journal, Mar 1 2014 [↩]
5. China’s apparel retail market: $218 industry by 2016, Trans World News, Aug 3 2013 [↩]
6. B2C Ecommerce Sales Climbs Worldwide, as Emerging Markets Drive Higher Sales, eMarketer, Jun 27 2013 [↩]
7. Apparel in China, Euromonitor, May 2013 [↩]
8. China’s bid to provide care systems for elderly faces hurdles, warn experts, South China Morning Post, Sept 4 2013 [↩]