Abercrombie & Fitch Earnings Preview: Updated Portfolio Can Accelerate Recovery

Abercrombie & Fitch‘s (NYSE:ANF) has spent a big part of last year transitioning its merchandise portfolio from mostly basic to mostly fashion-forward, with an aim to reinvent itself as a fast-fashion player. By the end of Q2 fiscal 2015, the company had revamped a major part of its portfolio, which was reflected in its results as the decline in Hollister’s comparable sales came down to just 1%. We believe that the brand delivered an even better performance in the third quarter, results for which are scheduled to come out on November 20th. We also expect better results from Abercrombie’s mainline brand, which did not do too well in the second quarter. The company mentioned in its Q2 earnings call that its namesake brand is taking a little longer than usual with its transition to a classic premium brand. However, it likely covered some additional ground in the recently concluded quarter, which should all be evident in a sequential improvement.

Our price estimate for Abercrombie & Fitch stands at $ 28, 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” aura that had long been at the center of its marketing image. ^[2]

By the end of Q2, in almost 100 Hollister stores, shutters on the store windows had been replaced by video screens and signature scent had been dialed down by 75%. Five remodeled stores, which were lighter and brighter with subtle interiors and artificial trees, leather sofas and oriental rugs, had performed very well. During Q3, these formats were rolled out on a larger scale, which should be reflected in even better results for Hollister. Management has stated that customers have so far responded positively to the updated Hollister, further suggesting an impending recovery for Abercrombie.

While Abercrombie has been seamlessly developing the ‘fast-fashion’ version of Hollister, progress on A&F has not been as healthy. This is evident from the fact that A&F’s comparable sales had declined 7% in Q2 despite a big change in its merchandise range. It appears that the brand is still struggling to find its place in the market, though we believe it is headed in the right direction. With the new brand structure, A&F can get some new merchandising and pricing strategies relevant to the update designs, that can gradually pull the brand out of its slump. We expect to see a glimpse of this in the upcoming quarterly results.

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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 [↩]