Abercrombie & Fitch Sees Upside From Internet & Catalog Orders

Abercrombie & Fitch (NYSE:ANF) is a leading apparel company that primarily targets teens and young adults in the US. It competes with retailers like Aeropostale (NYSE:ARO), Gap (NYSE:GPS), J.Crew Group (NYSE:JCG) and Urban Outfitters (NASDAQ:URBN), and owns apparel brands such as A&F, Hollister and Gilly Hicks.

Our price estimate for Abercrombie & Fitch stock is $53.34, roughly 6% above market price. We estimate that A&F Stores account for 37% of the company’s stock value compared to 29% for Hollister stores. The Internet & Catalog Orders contribute around 19%.

December has been a mixed month for retailers, with some retailers like Gap and American Eagle failing to meet expectations while others like Abercrombie & Fitch doing well. Overall, comparable store sales for retailers increased by only 3.1%, slightly lower than Wall Street’s forecast. ^[1]

However, Abercrombie & Fitch did surprisingly well, with net sales for the month increasing by 26% as compared to the same period last year. This was supported by growth from both direct and store channels. Its net direct-to-consumer sales (our Internet & Catalog Orders division) increased by 59% and net comparable store sales increased 13%. The comparable store sales was driven by growth from both its flagship A&F and Hollister brands with these stores reporting comparable store increases of 13% and 17%. ^[2]

However, comparable store sales are strong in part due to a low base effect as Abercrombie & Fitch being one of the worst hit retailers during the recent economic downturn. The revenue per square foot for A&F and Hollister stores fell considerably in 2008 and 2009. Going forward, the revenue per square feet for these brands can be impacted by increasing competition from similar fashion forward brands from Europe and Japan, who are scaling up their operations in the US. ^[3]

Strong Internet & Catalog Business

However, the company has been doing particularly well in the direct-to-consumer segment, that is, sales through Internet and catalog orders. Abercrombie & Fitch’s Internet & catalog orders revenues increased from nearly $120 million in 2005 to $250 million in 2009 driven by growth in online sales with increasing Internet penetration. We expect it to increase to nearly $500 million by 2013 as the company further increases the reach of its direct (online) channel with more online marketing, in addition to the rising popularity of e-commerce channel among consumers for their retail purchases.

In December, direct-to-consumer sales increased by 59% over the same period last year with year-to-date direct-to-consumer sales up by 44% for the 11 month period ending 31st December. ((Abercrombie & Fitch Reports December Sales Results)).

This is higher than our current estimates for 2010, in which we forecast the direct-to-consumer sales/ Internet & catalog revenues to be up by 14% for the full  year. Our current estimates forecast growth of around 15% over the next few years for this segment.

If we increased the annual growth rate to 20% through the forecast period vs. 15%, the Internet & catalog Orders revenues would reach around $700 million by 2013 providing an upside of almost around 8% to our current price estimate for Abercrombie & Fitch’s stock.

See our full estimates for Abercrombie & Fitch here.

1. Dec US retail sales show shoppers still wary [↩]
2. Abercrombie & Fitch Reports December Sales Results [↩]
3. Foreign Apparel Chains Invade US With Fast Fashion [↩]