Abercrombie & Fitch’s Direct Business Is Its Only Beacon Of Hope

September 30th, 2016 by Trefis Team
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ANF: Abercrombie & Fitch logo
ANF
Abercrombie & Fitch

Abercrombie & Fitch (NYSE:ANF) posted its 14th consecutive quarter of declining sales in the second quarter, while at the same time saying the comparable sales will remain challenging for the remainder of the year as well. This is a swift about-face from the forecast the company issued in May, when it expected results to improve in the second half of the year. Lower traffic, particularly from tourists, can be primarily blamed for this. Moreover, the company has struggled to compete with fast-fashion brands, such as Zara and H&M. While Abercrombie has attempted to convert Hollister into a fast-fashion house, by hiring designers to keep up with the trends, and shifting away from the logo-centric designs, the comparable sales for the brand fell in the quarter, after a flat performance in the first quarter. The only source of revenue growth for the company in recent times has been its DTC (Direct-To-Consumer) segment. The revenues from this segment have grown to contribute 23% of the total sales in the second quarter, as compared to 21% in the previous year.

See our complete analysis for Abercrombie & Fitch

Amid a dismal second quarter, the apparel manufacturer’s only promising trend was its direct business, which includes web transactions and sales placed online within a store. While overall sales fell 4.2% in the second quarter, its DTC sales increased 4.9%. ANF is focusing on its mobile and omni-channel capabilities, which saw strong growth, both in the domestic and the international markets. Sales through mobile orders jumped nearly 60%, and their recent initiative of ‘buy online, pickup in store,’ accounted for 7% of all online orders. The retailer already offers this option in the US and the UK, and plans to roll it out in Canada in the third quarter.

ANF- DTC as % Revenue

In order to further bolster growth in this segment, Abercrombie & Fitch also recently announced a wholesale agreement with Zalando, Europe’s largest online platform for fashion. The German-based online retailer carries over 150,000 styles from more than 1,500 brands, and serves 15 European markets. The products of Abercrombie & Fitch, Hollister, and abercrombie kids will be available for sale on the platform, and will get the advantage of Zalando’s 18 million active customer base. According to internetretailer.com’s top 500 e-tailers of Europe, the German company ranks 7th, with estimated web sales of $3.31 billion in 2015. It is considered to be one of the best internet retailers in Europe, supplying products from a number of major US brands, such as Nike, Ralph Lauren, Kate Spade, and Under Armour, along with European designers, including Armani Jeans, Hugo Boss, and Versace. For Abercrombie to be able to get an access to Zalando’s almost 19 million active users, who are regularly engaged through Zalando’s email marketing, will be immense. Furthermore, since every sale through this website will be additional revenue, without any fixed costs associated, it may have a positive impact on the margins. The company is also not that heavily present in the continent, and hence, a presence on the website will not result in cannibalization. In the past as well, wholesale arrangements with online retailers such as Next plc and Asos Plc in the United Kingdom have resulted in increased revenue, with $10 million additional sales in the year 2015.

ANF- Zalando

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Abercrombie & Fitch
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