Is Abercrombie & Fitch Up For Sale?

Apparel retailer Abercrombie & Fitch (NYSE:ANF) is reported to be working with investment bank Perella Weinberg to deal with takeover interest, sources told Reuters. With the company’s shares trading at a 17-year low, the time for a buyout may be ripe. The poor performance of its share price reflects the poor sales and earnings generated by the company of late. During 2016, the stock price plummeted 56% to end the year at $12.

The once iconic teen retailer has failed to keep up with changing preferences among customers, and has suffered as a result, plagued with a number of periods of declining sales. The company scored the lowest on the American Customer Satisfaction Index for the retail industry, with a score of 65, almost 10 points below the entire sector’s overall score.

Abercrombie has undertaken a bevy of changes to turn around its fortunes and to revamp its image. Before we delve into these, the financial performance of the company in the latest reported quarter has been detailed.

ANF Misses Consensus Estimates

Apparel retailer Abercrombie & Fitch posted its fourth quarter and financial year (ended January 2017) results on March 2, wherein it reported a 7% fall in sales, its 16th straight quarterly sales decline. The company missed consensus estimates on earnings by 4 cents a share, and its revenues by $10 million, in the quarter. Despite this, the stock price was up by over 13% on the day, mostly as a result of some improvements seen for Hollister. The aforementioned brand performed well for the company despite a challenging retail environment, which had prompted the company to increase its level of promotions. In particular, the categories of denim, knit tops, and outerwear showed a strong performance. However, for Abercrombie, the brand was not able to overcome the challenges posed by the tough apparel market, which resulted in a slower than expected progress of the brand revitalization plans. The company’s flagship and tourist stores weighed heavily on the results, due to the persisting traffic headwinds.

The direct-to-consumer (DTC) segment delivered growth across both the US, and international markets, fueled by the company’s investments in mobile, omnichannel, and fulfillment. On a total company basis, the DTC business now accounts for 31% of the sales, as compared to 28% last year. The purchase online, and pick up in store initiative was rolled out across the stores in the US and Canada, following a successful rollout in the UK, and this now accounts for 7% of all DTC orders in the combined markets in which it is available.

A Change In Strategy Needed

After a number of periods of poor sales, Abercrombie & Fitch has been undertaking a shift in strategy to turn around its fortunes. Some of these efforts have been highlighted below.

1. New Prototype Stores And Loyalty Program

During FY 2016 (year ended January 2017), ANF converted 65 additional Hollister stores into the new prototype format, with positive feedback received regarding the same. Based on the learnings and extensive conversations undertaken by the company with more than 1.5 million customers, the company developed a new prototype concept for A&F, the first of which was unveiled in February 2017. Furthermore, after a successful rollout of the Hollister Club Cali loyalty program in the US, the company is on track to launch the A&F club loyalty program. Club Cali points are earned on eligible product purchases when a membership ID is provided at most Hollister stores or while shopping on their website. This program had attained 5 million members by the end of January 2017.

2. Partnerships With Online Retailers

Abercrombie & Fitch, on April 10, announced a partnership with online fashion retailer Zalora, which has a presence in 11 countries, including Singapore, Thailand, Indonesia, Hong Kong, and the Philippines. The US retailer will start with selling Hollister products through the online platform, and ANF merchandise following thereafter. Such an agreement would give Abercrombie access to Zalora’s 600 million online customers, located mainly in Southeast Asia, where the company does not have much of a retail presence. A young population, 70% of which is under 40 years of age, a lack of big box retailers, and a growing middle class are expected to make the region’s internet economy surge to a massive $200 billion annually by 2025. This would make the e-commerce in the region grow at an annual rate of 32% per year, reaching $88 billion in the next decade, with all six countries in the region expected to have an e-commerce market of at least $5 billion.

Abercrombie & Fitch has also tied up 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 are available for sale on the platform, and will get the advantage of Zalando’s 18 million active customer base. For Abercrombie to be able to get an access to Zalando’s sizable number of 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.

3. Revamping Its Image

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. The company 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 2016.

• The company has made attempts to shift its target market to 20-year olds, from teenagers earlier.
• The stores now have a smaller footprint, with larger fitting rooms, integrated with technology.
• The overpowering perfume, which filled the stores earlier, has also been modified to a fresher, cleaner fragrance.
• In order to better engage its customers, the company is also improving its social media presence. ANF recently did a Snapchat takeover for National Pizza Day, and got over 6 million views.

4. Store Closures

In 2017, the company expects to close approximately 60 stores in the US through natural lease expirations. Additionally, with about 50% of the US leases expiring by the end of FY 2018, the company has significant flexibility to strike the right store count balance, and drive efficiency by remodeling or resizing the stores, renegotiating leases, or shuttering down. This closure follows the 53 other shops that were shut in FY 2016, and the many others closed in the years prior. In theory, the company’s comparable sales should show an improvement when the unprofitable stores are closed down.

However, these efforts may still not be enough to turn the company around, due to the general macroeconomic weakness and the current soft state of the retail industry. The company also faces competition from fast-fashion retailers, such as Zara and H&M. These brands are able to move styles from the runway to the stores within weeks, constantly evolving their assortment and keeping their products fresh. Abercrombie is working on its speed to market, and in this regard, it augmented its fulfillment capabilities to the West Coast with a third-party facility, to better service customers in that region of the country.

See our complete analysis for Abercrombie & Fitch

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

• Can 2017 Be A Good Year For Retail Stocks?
• Part 2: Is There A Way Out Of The Rut For Brick And Mortar Stores
• Retailing Conundrum, Part 1: Is There A Way Out Of The Rut For Brick And Mortar Stores?
• Abercrombie & Fitch’s Direct Business Is Its Only Beacon Of Hope

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