Abercrombie & Fitch Growing Globally, Improving Margins

Abercrombie & Fitch (NYSE:ANF) is a leading apparel company that primarily targets teens and young adults in the U.S. 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.

Looking at the Holiday Season

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%.

January has been a good month for retailers with YOY comparable store sales for the month across the retail industry increasing by 4.4%, nearly 2% higher the Wall Street forecast according to Retail Metrics as reported by Investors Business Daily. ^[1] Specialty apparel chains did especially well with comparable store sales for this group increasing by 6.4%. However, teen apparel retailers reported a decrease of 0.7%, which could be due to various factors including high teen unemployment. ^[1]

Abercrombie & Fitch did not do particularly well, with its comparable store sales for the month down 4%. However, its Internet & catalog orders sales increased by over 20% and international sales increased by over 40%. As a result, the company reported a net 6% increase in sales as compared to the same month last year. Among its stores, the A&F stores did better with an increase in comparable store sales of 3%, but Hollister and abercrombie kids comparable store sales declined 8% and 11% respectively. ^[2]

International Growth

As a result of the company’s global expansion initiatives, its international sales have been increasing considerably. The international sales as % of total sales was around 12% for fiscal 2009 but increased to nearly 20% for fiscal 2010. The company has been doing especially well in Asia, which is being a focal point of the global specialty retailers largely due to the rising disposable incomes of the people in this region. In addition to this Abercrombie & Fitch is also expanding its presence in Europe. It has chosen a prime location in Hamburg to open a flagship store. ^[3]

For its relatively new brand Gilly Hicks that sells intimate wear for teen and young women, sales have been improving considerably, but it still constitutes a very small portion of total sales (around 1%). The company remains committed to growing this brand and is first looking to improve the brand’s productivity before aggressively expanding its store count.

On that front, it has decided to introduce smaller Gilly Hicks stores. The new stores are expected to be around 5,000 sq.ft in size from the earlier 10,000 sq.ft format. ^[2]

The number of Abercrombie & Fitch stores has remained almost flat from 2005 and 2009. Going forward, we expect this number to increase gradually as the company expands its business in Europe and Asia.

In addition to this, the margins for A&F have been improving in fiscal 2010. It has been benefiting from the rebound in consumer spending and the fact that it does not generally resort to heavy discounting in order to protect its premium brand image.

The EBITDA margin for Abercrombie & Fitch stores declined from around 26% in 2007 to 16% in 2009 driven by falling sales and increasing operating expenses. With the company committed to cutting down on its Average Unit Cost (AUC) and marketing, general and administrative expenses, we expect that the EBITDA margin for this division will gradually increase to around 25% by the end of our forecast period.

However, if it reaches around 30% by the end of our forecast period, it would mean an upside of around 6% to our current price estimate for A&F’s stock.

1. Retailers Blow Out Jan Sales Forecast As More Upbeat Shoppers Brave Storms [↩] [↩]
2. Abercrombie & Fitch Reports January Sales Results [↩] [↩]
3. Abercrombie & Fitch chooses Alte Post Hamburg for Flagship Store [↩]