Abercrombie & Fitch Earnings Preview: Weak Demand And Traffic Decline Will Suppress Growth
Abercrombie & Fitch (NYSE:ANF) is scheduled to release its third quarter results on December 3rd. In a press release earlier this month, the company reported that its net sales in the third quarter decreased by a staggering 12%, with 10% fall in comparable sales. The decline in comparable sales was more intense in international markets as foot traffic in European stores fell significantly during the quarter, on account of the sluggish economic environment. Overall, comparable sales fell 8% in the U.S. and 15% internationally.
Abercrombie’s sales were going weak in August and sales trends worsened in the subsequent months, despite the marginal improvement in the U.S. macro-economic environment. Apart from weak traffic in Europe, poor demand for logo products also had a severe impact on the retailer’s sales. It ushered heavy markdowns to compensate for low traffic and weak demand, that weighed on its gross margins during the third quarter. Abercrombie stated in its update that it now expects its Q3 gross margins to erode moderately as compared to the same quarter last year. Along with updates on its sales growth, the company guided its non-GAAP net income per diluted share at $0.40-$0.42. [1]
Our price estimate for Abercrombie & Fitch stands at $39, which is about 35% above the current market price.
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The main factor behind the retailer’s continued sales slump is the fall in foot traffic, which can be attributed to weak demand for logo products and customer shift from store to online shopping. While Abercrombie has been selling fashion at a rapid pace, its logo products (which account for a bulk of its portfolio) have failed to attract customers. In the present environment, buyers are preferring fast-fashion products from brands such as Zara, Forever 21 and H&M, over basic logo bearing merchandise from casual apparel retailers. As a result, players such as Abercrombie and American Eagle Outfitters (NYSE:AEO) have seen customers shun their logo products, which has led to weak financial performance. However, since Abercrombie has decided to gradually phase out its basic logo merchandise, customer response to its products should eventually get better. Meanwhile, its sales will most likely continue to stumble.
Even though U.S. retail sales in the three month period from August-October increased at an average of 4.5%, foot traffic across the industry declined at an alarming rate. This is attributable to the fact that U.S. buyers have been increasingly switching to online shopping from brick-and-mortar shopping. This trend has had a negative impact on sales growth of several retailers, including Abercrombie, whose online channel isn’t big enough to drive the overall revenue growth. This is evident from the fact that the company’s comparable sales declined 10% in the recently concluded quarter, despite 8% rise in direct-to-consumer revenues.
According to ShopperTrak, a firm that tracks store traffic in over 40,000 outlets across the U.S., store visits have fallen consistently by close to 5% in almost all the months of the past two years. Even in August, 4.7% fewer shoppers went out for shopping as compared to the previous month. [2] [3] In fact, it is worth noting that store traffic in September 2014 was 17% below what it was in the same month last year. [4] With significantly fewer shoppers in the market as compared to last year and low interest in basic products, Abercrombie had a tough time in attracting customers.
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- Abercrombie & Fitch Provides Third Quarter Business Update, Abercrombie & Fitch, Nov 7 2014 [↩]
- Shoppers Are Fleeing Physical Stores, The Wall Street Journal, Aug 5 2014 [↩]
- Back-To-School Slump Raises Concerns About Holiday Season, Bloomberg, Sept 23 2014 [↩]
- Brick-and-Mortar traffic falls 17% in September, Retail Dive, Oct 10 2014 [↩]