Abercrombie & Fitch Earnings Preview: Weak Portfolio And Traffic Decline Will Subdue Growth

Abercrombie & Fitch (NYSE:ANF) has been struggling for a long time now, initially due to its over reliance on logo merchandise and lately due to its strategy of aggressively phasing out basic logo products. Amid all of this, a consistent decline in foot traffic on account of the ongoing online shift has made things worse for the company. When the retailer comes out with its Q4 fiscal 2014 earnings on March 4th, we expect its results to be bogged down once again by the aforementioned factors.

In fact, during its third quarter earnings call, Abercrombie slashed its full year EPS guidance to $1.52-$1.65 from its earlier outlook of $2.15-$2.35. This was an alarming revision and it confirmed that the company was itself unsure of its performance during the holiday quarter. Abercrombie’s fashion inventory remains limited and its portfolio has been weakened by the absence of logo merchandise. While the management believes that this strategy is necessary for the revival of its brand image, it is weighing heavily on Abercrombie’s overall results. During the third quarter of fiscal 2014, the company’s comparable sales fell a very sizable 10%, and it might report a similar figure yet again.

Our price estimate for Abercrombie & Fitch stands at $37.30, which is about 50% above the current market price.

See our complete analysis for Abercrombie & Fitch

Weak Product Portfolio

There was a time when Abercrombie’s logo on basic t-shirts and jeans was enough to attract customers, but it is no longer the case. Over the past two to three years, U.S. shoppers have shown great interest in fashion-forward products from Zara, Forever 21 and H&M, but little affinity towards logo branded basic products from Abercrombie. As a result, the company’s revenues have declined significantly, since it persistently relied on the logo business hoping that its iconic brand image would eventually bring customers back.

However, given that U.S. buyers have shunned basic logo products altogether irrespective of the brand, Abercrombie decided to aggressively transition its portfolio from basic logo products to non-logo fashion products. Last year, in an earnings announcement, the management stated that they will reduce their logo business to “almost nothing” within 12 months and replace it with fashion-forward inventory. Although the change appears too drastic, we believe that this was a much needed step. However, this strategy has resulted in significant revenue decline so far and we believe this trend continued in the recently concluded quarter.

Traffic Decline

Over the past couple of years, there has been a notable decline in foot traffic across the retail and apparel industries, as shoppers increasingly have moved online. While this has boosted growth for pure play online players, retailers such as Abercrombie that rely on store sales for the bulk of their revenues have been on the receiving end. During the three month period ended January 31, foot traffic across the industry was down significantly, which likely contributed to Abercrombie’s comparable sales decline. During the holiday season, industry-wide foot traffic fell a sizable 8.3% year over year, according to data compiled by RetailNext. In the subsequent month, the foot traffic decline remained intense at 7.7%, implying that store based retailers such as Abercrombie had a tough time during the quarter. ^{[1] [2]}

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1. Holiday season U.S. store sales down 8 percent in 2014: RetailNext, Reuters, Jan 7 2015 [↩]
2. RetailNext: January store sales, traffic decline, Chain Store Age, February 6 2015 [↩]