Why Abercrombie & Fitch’s International Expansion Makes Sense Despite Europe Concerns

Abercrombie & Fitch (NYSE:ANF) earns close to 36% of its net revenues from international markets, with Europe being the largest contributor to its international business. Due to its ill-planned expansion in the region, which led to issues of self-cannibalization, the company’s international comparable sales have fallen at a faster rate than its domestic comparable sales over the past few years. The  bulk of Abercrombie’s problems are specific to the U.S. and yet, its international performance has been more disappointing. However, we believe that continuing its expansion in markets other than the U.S. makes ample sense for the company. Abercrombie lacks the room for expansion in the U.S., but it has several opportunities to explore in markets such as Russia, China, South Korea, etc. Moreover, an average Abercrombie international store is about 85% more productive than a domestic store (in terms of revenue per square feet), which clearly indicates that stores in lucrative international markets are good option for the company.

Our price estimate for Abercrombie & Fitch stands at $29, which is about 45% above the current market price.

See our complete analysis for Abercrombie & Fitch

Abercrombie’s Struggle In Europe

Abercrombie’s performance in Europe greatly impacts its overall international results, because the region accounts for over 75% of the company’s total international revenues. Between 2010-2012, Abercrombie expanded aggressively in the market, increasing its total international store count from 52 to 139. However, the retailer did not plan its expansion well, which resulted in a high concentration of stores in a few tourist destinations. This resulted in Abercrombie cannibalizing its own sales, which has troubled it to date. The company’s international comparable sales fell 8%, 19% and 12% in 2012, 2013 and 2014, respectively. In addition to self-cannibalization, lingering economic weakness in countries such as France, Italy and Germany (Abercrombie’s main markets in Europe) contributed to the company’s under-performance. Lately, Abercrombie has shown some latent signs of recovery, driven by better-than-expected results in the U.K. and France, but it hasn’t been able to improve its performance across the board.

Significant Expansion Room Available In International Markets

Abercrombie is running out of expansion room in the U.S. In fact, it has been consolidating its store network for a while, in order to minimize the risk of self-cannibalization, improve profitability and move towards an omni-channel portfolio. In international markets however, the company has ample room for expansion in the form of underpenetrated markets in Europe, as well as lucrative markets in Asia, the Middle East and Australia. Continued store expansion will bring in incremental revenues for the company, which is vital for its business growth. Abercrombie has slowed its expansion pace in Europe over the last couple of years, but it has been growing its store base nonetheless. The illustrations below shows the comparison of the company’s domestic and international store base over the years.

Abercrombie is looking to target underpenetrated markets in Europe to continue its expansion. The company operates just 10 stores in Ireland, Sweden, Poland and the Netherlands combined. It has yet to tap Russia, which holds good potential for western apparel retailers. In Asia, Abercrombie operates just 11 stores in China, seven stores in Japan, four stores in Republic of Korea, and one in Singapore. These markets have enough potential to hold a significantly larger number of Abercrombie stores. Even in the Middle East, where Abercrombie just has four stores, there is some room for further expansion.

International Stores Are More Productive

Another factor that justifies Abercrombie’s continued international expansion is the significantly higher productivity of its international stores. While an average U.S. stores generates about $420 per square feet, an international store generates close to $770 per square feet. This can be attributed to Abercrombie’s historic expansion strategy in Europe. The company initially targeted tourist locations in the region with a relatively higher foot fall, which pushed its international revenue per square feet above the domestic level. This indicates that Abercrombie’s European expansion strategy, which eventually pummeled its comparable sales growth, had a silver lining. For expansion in underpenetrated and untapped markets, Abercrombie should follow its historical strategy, but it needs to plan its approach more cautiously.

The illustration above shows Abercrombie’s revenue breakdown geographically (2014). It is clear that Abercrombie is heavily reliant on its domestic business at the moment. Its operations in Europe also account for a notable portion of net revenues, but it is the “others” segment that the company has to push higher, given that the U.S. isn’t contributing much to its overall growth. Abercrombie can achieve this target by identifying lucrative opportunities in Asia and the Middle East, and adding stores that can be more productive than the U.S.

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