Abercrombie Earnings Preview: Reinvented Brands Can Take Charge After A Weak Q2

Abercrombie & Fitch‘s (NYSE:ANF) shares have declined by more 60% over the past year, due to the company’s consistently weak financial performance. While the retailer’s aggressive portfolio transition from mostly basic-logo to mostly fashion merchandise was a necessary move, it has thus far weighed heavily on sales. Abercrombie had been rapidly phasing out its logo products, but it wasn’t adding fashion to its portfolio at the same pace. This resulted in a decline in revenues for the company, which most likely continued in the second quarter as well. Therefore, we  expect Abercrombie to report fairly modest results in its Q2 earnings release on August 26th.

However, the retailer is almost done with its portfolio transition and has recently announced new brand leadership for its main brand. It has overhauled its marketing strategies and is now focusing on young adults in addition to teenagers. With the brand reinvented, we believe that Abercrombie can see a notable improvement in sales going forward. However, it remains to be seen if the retailer’s risk has paid off. It has been often advocated that casual apparel retailers need to leave their logo inventory aside and focus on fashion in order to survive the competitive threat from fast-fashion companies. Abercrombie initiated this transition ahead of  its competitors and it will soon become clear if this indeed was a valid move. Therefore, we will closely monitor the brand’s underlying performance in the upcoming earnings call.

Our price estimate for Abercrombie & Fitch stands at $29, implying a significant premium to the current market price.

See our complete analysis for Abercrombie & Fitch

The company’s COO Jonathan Ramsden had stated last year that they wanted to recreate A&F as a classic premium brand and Hollister as a fast-fashion brand. ^[1] The retailer has accordingly transitioned the brands’ portfolio with painstaking attention to detail. Alongside, Abercrombie has revamped its in-store designs and tweaked its marketing strategies to get rid of the “sex appeal”, which had long been at the center of its marketing image. ^[2] The retailer’s ads aren’t featuring shirtless models sporting logo merchandise anymore. The company is instead running much more subtle ads with models wearing classic designs without the loud logos. Abercrombie has almost achieved what it was striving for and now success solely depends on how customers react to the sudden change in the brands’ new merchandise range, marketing campaigns and shopping experience. It will be interesting to see what the company has to say about the initial customer reaction to this change.

In the upcoming earnings call, we will also keep an eye out for how the company plans to leverage the recently announced change in A&F brand leadership. About a week back, Abercrombie unveiled a new leadership structure for its mainline brand, appointing experienced individuals to the positions, as follow: a GM (general manager) of  A&F; two head designers of A&F (one each for both Men’s and Women’s):  a GM for abercrombie kids; and, lastly, two heads of planning operations for A&F and abercrombie kids, respectively. ^[3] Except for Stacie Beaver (GM for A&F women), others have joined the company recently from Club Monaco, Kohl’s, Carter’s and PVH. Such an overhaul at the top management level for the namesake brand clearly indicates Abercrombie’s resolute focus on recreating its brand image. The retailer understandably does not want to leave any loose ends as it prepares to reposition itself in the league of fast-fashion players such as Zara, H&M and Forever 21.

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

1. Abercrombie has completely reinvented itself, Business Insider, Aug 24 2015 [↩]
2. Abercrombie is killing the nightclub vibe in its stores, Business Insider, May 22 2014 [↩]
3. Abercrombie & Fitch announces new leadership team for A&F brands, Abercrombie & Fitch, Aug 18 2015 [↩]