How Can Abercrombie’s Kids Business Recover?

Abercrombie & Fitch (NYSE:ANF) has introduced a big change in the way it markets and positions its mainline brands — Abercrombie & Fitch and Hollister — and how they look. It has infused its namesake brand with classic clothing embedded with subtle design and Hollister is being presented as a trendier fast-fashion brand. While initial response to this change has been promising, Abercrombie still needs to do something about its minor business – abercrombie kids – to facilitate a turnaround across the board. The segment, which we estimate accounts for less than 10% of the company’s value, has not had the best time lately. Its revenue per square feet (excluding online sales) has fallen from $426 in 2012 to $374 in 2014 due to a slowdown in overall apparel sales, a pullback in consumer spending,  and a customer shift to the online channel. However, going forward, a decline in competition resulting from the closure of 77 Kids and the consolidation of P.S. from Aeropostale, along with the relatively stable nature of the kids’ apparel industry, are likely to help abercrombie kids recover gradually.

Our price estimate for Abercrombie & Fitch at $28 implies a significant premium to the current market price.

See our complete analysis for Abercrombie & Fitch

The Market Is In A Good Position

The tween apparel industry, which stands big at over $180 billion, is in better shape than the teen and the adult apparel segments. This can be attributed to the fact that competition in the pre-teen apparel market isn’t as intense as in the teen apparel market and consumer spending on clothing is relatively stable in the tween space. Although there are several established apparel retailers in the U.S., most of them focus on teenagers and young adults due to their preference for apparel shopping. This has made the pre-teen apparel market somewhat niche and safe to enter. Moreover, unlike the teen apparel space, where buyers often rely on their own income, kids are dependent on their parents for apparel shopping. In the current economic environment, the employment scenario for adults (who earn more) is much better than it is for teenagers, implying that adults have a higher budget for apparel and accessories. These factors bode very well for abercrombie kids’ growth.

Competition Is Declining

Abercrombie’s arch rival American Eagle Outfitters (NYSE:AEO) sold its 77kids business in 2012 to Ezrani 2 Corp., in order to divert its resources to the mainline business. 77kids was previously a competitor to abercrombie kids, and even though it was reopened under the brand name Ruum American Kids, it did not emerge as a big threat for Abercrombie. abercrombie kids‘ other competitor, P.S. from Aeropostale, has had troubles of its own. Aeropostale (NYSE:ARO) decided to move its kids apparel stores from malls to off-mall locations, in the wake of falling mall traffic. While the retailer has rapidly closed its mall stores, reducing the store count from close to 150 to 26, it does not have enough capital to finance the brand’s rapid expansion. Since expansion of P.S. from Aeropostale is expected to be extremely slow, abercrombie kids would have one less competitor to worry about.

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