How Has Abercrombie Performed In 2016?

2016 has been a challenging year for Abercrombie & Fitch (NYSE:ANF), with comparable sales declining 5% year to date. In the latest quarter (ended October 2016), while Hollister offered sequential improvement in the comparable sales, it was more than offset by the poor performance of the A&F brand. Hollister received a positive response to its product innovations. However, for A&F, the flagship and tourist locations continued to suffer as a result of poor traffic. Furthermore, the underperformance of seasonal categories in the brand forced a greater-than-planned promotional activity. The direct-to-consumer (DTC) business continues to grow, both domestically and internationally, with the segment accounting for 23% of the total company in the quarter, up from 21% last year. These top-line headwinds are anticipated to continue through the rest of the year, but, modest comp sales trend improvement in the fourth quarter can be expected.

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The Abercrombie brand has undertaken a massive rebranding initiative after parting ways with its former CEO Michael Jeffries in late 2014, to move away from the reputation it had built in the last decade, because of which the company was also voted the most hated retail brand in February of this year. The brand has in the recent past faced criticism for employing model-worthy staff in its stores, and by giving the impression it just wants good looking people to wear its clothes. A&F has also made attempts to remove its infamous logo from its merchandise. This follows from millennial consumers’ increasing preferences of clothing and accessories without labels or logos, according to a report by Goldman Sachs. The new marketing campaign being run by the company celebrates individuality and uniqueness, in contrast to earlier ones which focused on exclusivity. However, it seems  that the campaign has failed to resonate with consumers, indicating that the brand’s problems run much deeper than just the foreign exchange and tourist traffic headwinds.

The efforts made by the company in its Hollister brand, to create an emotionally engaging brand experience, though may be working. Based on the success of their previous brand remodels, a further eight were completed in the third quarter, with an additional 12 scheduled to open in December, bringing the total of remodeled Hollister stores to 64 this year. The Hollister Club Cali loyalty program, rolled out in the US last quarter, was met with enthusiasm by the customer, acquiring nearly four million active members, and driving increased sales.

The DTC business is the only segment showing growth in the year. The investments made by the company in mobile are paying off, with a nearly 50% increase in sales from orders placed on mobile phones in the latest quarter. After a successful roll-out of buy online, pickup in store, first in the UK, and then in the US, earlier in the year, the service was rolled out in Canada recently. This feature continues to be popular, accounting for over 5% of all online orders. In order to further bolster growth in this segment, Abercrombie & Fitch also 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 European, the German company ranks 7th, with estimated web sales of $3.31 billion in 2015. The company has been increasing its investment on technology improvement recently, as well as spending more on marketing, in order to attract more customers. It is also considered to be one of the best internet retailers in Europe, and the availability of brands on this website does not diminish the brand value. A number of major US brands, such as Nike, Ralph Lauren, Kate Spade, and Under Armour, are present on the website, along with European designers like 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. Internet trade, in Europe, is expected to witness more dynamic growth than the overall retail sector. In 2016, the growth expected of the European retail industry is 1.2%, while that of the online trade is 10.6%. For Germany, as well, a similar scenario is forecast, with 1% estimated growth in retail, as compared to 11.4% for internet retail. This positive trend for European online trade is forecast to continue for the next several years, with a CAGR of 8.8% for the period 2016 to 2020. Within this segment, the online fashion industry is also predicted to see burgeoning growth. For Europe, the growth figure is estimated to be 9.6%, while for Germany it is 9.1% in 2016. The main drivers for the overall e-commerce growth have been identified as apparel and footwear, and this coupled with Zalando’s large customer base, wide brand awareness, and strong supplier relationships, will ensure the company’s continued success. These factors, in turn, will be beneficial to Abercrombie.

The company is also aggressively pursuing the optimization of its store count. For the year, the company expects to close 50 stores in the US through natural lease expirations. The company also stated that approximately 50% of its 745 stores in the US are up for renewal over the next 18 months, giving the management an opportunity to continue with the store reductions. Over the last six years, the company has shuttered 350 stores, allowing the company to cut costs and free up cash.

Have more questions about Abercrombie & Fitch? See the links below:

• Sales Slump Continues For Abercrombie
• A Decline In Sales Is Expected To Continue In The Third Quarter For Abercrombie
• Abercrombie Revamps Brand To Attract Customers
• Abercrombie & Fitch’s Direct Business Is Its Only Beacon Of Hope
• Abercrombie & Fitch Looks To The Middle East For Growth
• How Will Abercrombie & Fitch Perform In 2016?
• Why Has Abercrombie’s Stock Price Fallen 25% In The Last Week?
• Bleak Outlook Causes Abercrombie & Fitch’s Stock To Plummet 20%
• How Will Abercrombie & Fitch Perform In Q2 2016?
• What Does Abercrombie’s Deal With Online Retailer Zalando Mean?
• How Has Abercrombie & Fitch’s Revenue By Geography Changed Over The Last Three Years?
• Abercrombie & Fitch Plans Changes To Turn Their Business Around
• Who Relies On Debt More; Gap Inc or Abercrombie & Fitch?
• What Is Abercrombie & Fitch’s Revenue & Earnings Breakdown In Terms of Different Operating Segments?
• What Is Abercrombie & Fitch’s Fundamental Value Based On Expected 2015 Results?
• How Has Abercrombie & Fitch’s Revenue Composition Changed In The Last Five Years?
• By How Much have Abercrombie & Fitch’s Revenues & Earnings Grown In The Last Five Years?

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