Abercrombie & Fitch’s Fall Slows Down; Q1 Results Beat Estimates

Abercrombie & Fitch‘s (NYSE:ANF) shares increased by almost 5% in after hours trading after it reported better-than-expected results in the first quarter of fiscal 2014. The retailer’s revenues declined by only 2% to $822 million, which was much better than the consensus estimate of $798 million. ^[1] The company’s loss per share came in at $0.17 (excluding one time charges), while analysts were expecting loss to be around $0.19 per share. ^[2] Abercrombie’s comparable sales declined by 4% during the quarter, which was a significant improvement over the rate of decline the retailer had seen in the preceding quarters. Following these results, CEO Mike Jeffries, stated that earnings were in line with the company’s expectations and they were on course to meet their full year EPS guidance of $2.15-$2.35. ^[3]

In the upcoming quarters, Abercrombie will be focusing on reducing its average unit costs and revamping value-for-money Hollister brand in order to attract cost conscious customers. Alongside, it is planning to shut as many as 70 stores this year (as their lease expires), which can help it reduce expenses to a certain extent. ^[3] We believe that the retailer might persist with its consolidation strategy in the coming years to further boost its profitability. Improvement in Abercrombie’s product portfolio helped its sales during the quarter, and the company will continue to work aggressively on this front to gradually regain its lost customer base. Overall, these efforts can guide the company towards a slow revival, if not a complete turnaround.

Our price estimate for Abercrombie & Fitch stands at $39.72, which is about 5% ahead of the market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Abercrombie & Fitch

Closing Under-performing Stores Can Help Productivity

During its earnings release, Abercrombie unveiled plans to close 60-70 stores this year through natural lease expiration. The retailer appears to be following the store consolidation strategy, which has become prominent in the apparel industry lately. Retailers such as Aeropostale (NYSE:ARO) and American Eagle Outfitters (NYSE:AEO) are closing stores that do not generate significant revenues to improve their revenue per square feet and EBITDA (earnings before interest tax depreciation and amortization) margins. This move makes sense for Abercrombie as well, given that its sales and margins have taken a lot of damage over the past couple of years. Shutting stores that do not account for significant traffic can help the retailer’s productivity and profitability. Over the next two years, another 500 of Abercrombie’s stores will be up for lease renewal, which will allow the company to identify which locations it does not want to continue with.

Since Abercrombie is likely to close stores through lease expiration, it would not have to incur additional expenses related to store closing which was the case with its Gilly Hicks closure. The company incurred $5.6 million in the first quarter of fiscal 2014 in lease exit costs related to Gilly Hicks consolidation. ^[3] We believe that in coming years, Abercrombie will isolate stores that account for significant losses from its store fleet, and open stores at locations where demand is high. This can help the retailer improve its revenue per square feet and curb its losses.

Restructuring Hollister Stores Might Draw Some Customer Attention

Being a value focused brand, Hollister is the most integral part of Abercrombie’s product portfolio, given that buyers are placing a greater value on cost of products these days. However, the brand hasn’t been at its best for the last few quarters due to missed fashion calls and poor inventory mismanagement. As a result, buyers have moved to other low-cost fast-fashion brands such as Zara, Forever 21 and H&M. To win back customers, Abercrombie is making certain tweaks to its Hollister store structure. At the start of the year, the company started testing a new storefront for its Hollister stores, which it plans to roll out in another 75-100 stores by the year end. ^[3] The retailer is also planning to change the environment inside Hollister stores, which is traditionally dark and heavily scented. ^[4] Abercrombie recently redesigned the brand website and it will soon be launching a new marketing campaign that features an evolved image of the brand. ^[5] Later this summer, Hollister will be using a beach house in Southern California to host some music events in an attempt to strengthen its connection with customers. ^[4]

The company is also planning to sell its merchandise outside its stores and websites to encompass a larger group of customers. Later this year, Abercrombie will start offering its products on asos.com (British online retailer), which will bring in those customers who do not usually shop at Abercrombie. We believe that these moves will help Hollister revamp its brand perception and attract customers with popular merchandise at affordable prices.

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1. Troubled Abercrombie & Fitch posts smaller-than-expected loss, Financial Times, May 29 2014 [↩]
2. Abercrombie & Fitch Popping After Losing Less Money Than Expected, Forbes, May 29 2014 [↩]
3. Abercrombie & Fitch Co. Earnings Conference Call, Abercrombie & Fitch, May 29 2014 [↩] [↩] [↩] [↩]
4. Abercrombie & Fitch seeks to regain its cool with young shoppers, Market Watch, May 29 2014 [↩] [↩]
5. Abercrombie & Fitch’s Q4 fiscal 2013 earnings transcript, Feb 26 2014 [↩]