Abercrombie & Fitch To Debut In Mexico Next Year

Specialty apparel retailer  Abercrombie & Fitch (NYSE:ANF), recently announced its entry into Mexico. In a press release earlier this month, the company stated that it has signed a franchise agreement with Grupo AXO to establish a retail network for Abercrombie & Fitch and Hollister brands in the country. ^[1] Founded in 1994, Grupo AXO has built a great reputation for developing brands in the Mexican apparel market. The first Hollister store is scheduled to open in late spring next year  and Abercrombie & Fitch will make its debut in the summer. The company’s entry into Mexico will mark its debut in the Latin American region, which houses a couple of lucrative apparel markets. Abercrombie already has presence in North America, Europe, Asia, the Middle East and Australia. We believe that the company’s expansion in Mexico will position it better to compete against its domestic counterparts, Aeropostale (NYSE:ARO) and American Eagle Outfitters (NYSE:AEO), and fast-fashion retailers such as Zara, Forever 21 and H&M.

Although Aeropostale and American Eagle Outfitters had entered Mexico even before Abercrombie announced its expansion, the retailer might not have to face significant competition, given that it already has a customer base in the country. ^[1] Moreover, in addition to the country’s growing middle class and rising disposable incomes, it has young buyers that have become extremely conscious of international fashion trends, which bodes well for retailers such as Abercrombie. Even though the overall market size still remains small, it has grown steadily over the past and is likely to continue this way in the future. However, the current economic slump in the country can have a negative impact on the overall market growth. Nevertheless, given that Abercrombie will be starting from scratch, it shouldn’t have much trouble in gaining market share for the initial few years.

Our price estimate for Abercrombie & Fitch stands at $39, which is about 35% above the current market price.

See our complete analysis for Abercrombie & Fitch

Market Holds Good Potential for International Brands

The increasing proportion of  the working population in Mexico that is young has led to a surge in demand for apparel from popular international brands. While historically, apparel products have been available in Mexico through a number of channels, lately specialty retailers have become more popular. Aeropostale entered the region in 2012 and American Eagle Outfitters, Under Armour (NYSE:UA), and Victoria’s Secret made their debut in the market in 2013. The market is welcoming foreign retailers, as several major names are continually expanding in big cities such as Guadalajara, Monterrey, Cancun and Queretaro. This can be attributed to the fact that Mexican buyers have shown great interest in fast-fashion apparel, as they are looking to integrate fashion in their professional as well as social attire. This trend is visible in the Children’s segment as well, since the working population is spending more on their kids clothing. Even teenagers are looking to imitate their parent’s dressing style. ^[2]

With 79% of the Mexican’s living in urban areas and 46% under 25 years of age, the addressable market for casual apparel retailers such as Abercrombie is large. Moreover, Ernst & Young predicts that the number of households in Mexico with annual disposable income more than $50,000 will increase to 7.1 million by 2020, reflecting an increase of 50% in the country’s middle class. ^[3] The Mexican apparel and footwear market currently stands at $29.6 billion, and it is expected to grow at a steady pace going forward. Euromonitor projects $10 billion in incremental sales over the next six to seven years. ^[4] This should keep retailers such as Abercrombie interested in the market.

However, Economic Weakness can have a Negative Impact

The economic environment in Mexico has been fairly weak over the past couple of years. This year, the economy has grown at its slowest pace since 2009, and it was reportedly in recession during the first quarter of 2014. ^[5] Mexico’s GDP grew by just 1.3% last year, which was much slower than what the IMF projected. For 2014, the Mexican Central Bank had initially predicted the growth to be around 4%, but it later revised the guidance to 2.3% to 3.3%. Given that the country’s economic growth has been worse than projected for the past eight quarters, it is possible that 2014’s GDP growth levels fail to meet the Mexican Central Bank’s revised targets. A slump in domestic demand and investments are troubling the country’s economy, and President Peña Nieto’s restructuring plans have supposedly contributed to the economic slowdown. ^[5]

Mexico’s minimum wages remain the lowest in Latin America, and food and gasoline price inflation has severely impacted consumer discretionary spending. Around 50% of the population is below the poverty line and close to 30% have moved to the informal economy. Contributing to this is one of the points in the President’s restructuring plan, which permits the summary firing of even unionized workers. ^[5] While Mexican apparel market has grown steadily despite the economic troubles, we believe that these problems will have some negative impact on the market growth going forward. However, given that Abercrombie will be targeting the middle class, which is growing, it can ensure strong growth in the market during the initial few years of its operations. Subsequently, competition will become a significant factor.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Abercrombie & Fitch Announces Entry Into Mexico, Abercrombie & Fitch, Nov 21 2014 [↩] [↩]
2. Apparel and Footwear in Mexico, Euromonitor International, Jul 2014 [↩]
3. China and India: tomorrow’s middle classes, EY [↩]
4. Mexico Enters the Limelight, Business of Fashion, Oct 28 2014 [↩]
5. Unrest grows as Mexico’s economy goes into slump, WSWS, Jun 12 2014 [↩] [↩] [↩]