How Well Can Abercrombie Do In Its Biggest European Markets

During the last few years, Abercrombie & Fitch (NYSE:ANF) was very aggressive with its expansion in major European countries.  Ultimately, this resulted in a network of unproductive stores. Despite a slump in demand, the retailer persistently opened stores in key tourist locations and local attractions, that led to self-cannibalization even with a low store count (122 in 2013). However in 2012, the company finally decided to slow down its expansion in Europe in order to protect its bottomline growth. Abercrombie is now planning to target only under-penetrated markets for its expansion.

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 roughly 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 61 stores (2013).

While unfavorable economic headwinds still impact the U.K.’s apparel market, its large size and positive growth forecast look favorable for the specialty retailer’s growth. Germany is one of the largest apparel markets 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. It’s worth noting that e-commerce is likely to be the most crucial growth channel for the retailer in both these markets, given their high Internet penetration. In this analysis, we try to analyze how well is Abercrombie positioned in these two markets.

Our price estimate for Abercrombie & Fitch stands at $39, which is about 5% above the current market price.

See our complete analysis for Abercrombie & Fitch

The U.K.

Due to low disposable income, high promotions and changing shopping trends, the apparel market in the U.K. witnessed only marginal growth in 2012. Shopper’s not only lowered their spending on apparel products, but also started buying clothing and footwear that can be used for multiple occasions. In the following year, heavy discounting in the industry became prominent as unfavorable weather negatively impacted store traffic. ^[1] While these factors suggest that the market isn’t too lucrative, it stands large at $59 billion and has seen marginal but positive growth despite the unfavorable economic headwinds. Given that Abercrombie is at a nascent stage in the market, it can continue to grow at a decent pace driven by targeted expansion and growing visibility.

The retailer should be encouraged by the fact that casual wear is gaining tremendous popularity in the U.K. During the recent years, several U.K. offices have eased their regulations on professional attire and have adopted the “smart-casual” dress code. Jeans in particular, have become very common in workplaces as well as in social events. Professional attire retailers are struggling in the region as buyers are shifting to casual brands for their personal and professional shopping. For instance, tie retailer Tie Rack ended its operations in the country towards the end of last year due to a drastic decline in tie demand. ^[2]

Another factor that should please Abercrombie is growing market-wide focus on multi-channel retailing in the wake of soaring Internet penetration. About 72% of adults in the U.K. 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. Since Abercrombie is no longer expanding aggressively in the region, it can divert its focus and resources towards the development of a sound e-commerce and omni-channel platform, which can help it foster better sales through the existing store network.

Germany

While Germany’s apparel sales growth has been slow over the past few years, it still remains one of the largest markets in Europe with annual sales of more than $75 billion. Some value growth is expected going forward, as consumer interest in high-end clothing is gradually improving. This was a prominent trend in 2012, when buyers exhibited tremendous affinity towards high quality long-lasting clothing from popular global brands. Although Abercrombie can take advantage of this trend to a certain extent, it is up against strong apparel brands such as Hennes & Mauritz and C&A Mode KG, which have grown strongly in the market. Given that Abercrombie hasn’t done well against fast-fashion retailers in the U.S., it might face a similar problems in Germany as well. Nevertheless, the market is huge and Abercrombie has several growth opportunities at hand in the form of store expansion and e-commerce.

Since the company is not planning to expand aggressively in the market, it can focus solely towards the development of a strong e-commerce platform. The biggest positive of the German apparel industry is the robust growth of online apparel retailing, 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 86%. ^[3] Going forward, online apparel industry is likely to sustain its momentum as Forrester forecasts online sales in Europe will grow at a compounded annual growth rate of 12% for the next few years. ^[4] It also expects e-commerce sales to take up a significant portion of retail sales in Germany over the long term. ^[5] Abercrombie operated 24 stores in Germany at the end of fiscal 2013 and all of them were opened during the last five 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 and Footwear in the U.K., Euromonitor, Apr 2014 [↩]
2. Tie Rack begins the U.K. closing down sale, BBC, Nov 20 2013 [↩]
3. Top 50 countries with highest Internet penetration rates, Internet World Stats [↩]
4. European Online Retail Sales Forecast: 2013-2018, Forrester, May 29 2014 [↩]
5. U.S. Online Retail Sales To Reach $370B By 2017, €191B In Europe, Forbes, Mar 14 2013 [↩]