Is A Wave Of Consolidation About To Hit The Fashion Retail Industry?

Recent reports suggest that American Eagle Outfitters (NYSE:AEO) is considering a potential acquisition of Abercrombie & Fitch (NYSE:ANF). Both these brands are focused on teen and young adult apparel, and are largely located in malls across the US. However, in the face of the realization that millennials don’t want to go to malls, many mall-based retailers have been forced to announce several rounds of store closures in recent times. Softness in the retail industry is an oft-discussed topic, signaled by the spate of bankruptcies in the sector, such as Aeropostale, American Apparel, and Wet Seal. A number of companies are resorting to offering deep discounts and other promotions to lure in shoppers.

Despite efforts to turn around their business, many companies are struggling in the face of a multitude of problems, such as declining mall traffic, growth of online shopping, particularly Amazon, lengthy supply chains, and price-conscious shoppers. With a plethora of such problems, the retailers are finding it hard to achieve organic growth, which has been one of the drivers of the increased mergers and acquisitions in the industry. As these trends are not anticipated to die down in the future, a spate of consolidations can be expected in the industry. Another case in point has been the acquisition of Kate Spade by Coach (NYSE:COH).

Overcapacity In The Retail Space

Declining mall traffic and low prices offered by fast fashion retailers have been crushing apparel retailers. Recent years have been hard for teen retailers, with some even filing for Chapter 11 bankruptcy, such as Quicksilver in September 2015, Pacific Sunwear in April 2016, and Aeropostale in May 2016. Earlier in the year, news also surfaced regarding the shuttering of The Limited. Meanwhile, others have hobbled along, including Abercrombie & Fitch, and Gap Inc. (NYSE:GPS). These once sought-after brands, among high school kids in the US, have been blighted as a result of their over-reliance on the footfall at shopping malls, and the rise of fast-fashion brands, such as H&M and Zara. This has led to a number of companies shuttering their stores. Macy’s announced it was planning to close 100 stores or 15% of its fleet. The number for J.C. Penney is 138, while that for Sears has been revised from 42 to a minimum of 150. Retail analyst Jan Rogers Kniffen told CNBC in May of last year that he predicts 400 of the 1,100 enclosed malls in the US will close in the coming years, and only 250 of the remaining will thrive. The US has 23.5 square feet of retail space per capita, in comparison to 16.4 square feet in Canada and 11.1 square feet in Australia — the next two countries with the highest retail space per capita, according to a Morningstar report from October. Given this statistic, he further noted that the footprint is poised to decline “pretty fast.”

Industry consolidation will aid in the achievement of capacity rationalization, as merged companies let go of the underperforming stores.

Synergies To Help Lower Costs

A combined company creates better negotiating power, with both the suppliers and the vendors. Another opportunity that has arisen is the ability to merge the production facilities, the finance and marketing departments etc., in order to reduce the costs.  Such a scenario even existed with the merger of Coach and Kate Spade, as they both operate in a similar space. Given the rise of the digital space, both companies were working on their direct-to-consumer (DTC) channel. However, a move towards a more focused DTC business is not easy. And hence, the merger of the two companies will help to fortify their online channels. Furthermore, the store closure program of Macy’s will put greater pressure on brands seeking to get prized department store space. For this as well, a combined company will receive a  benefit from its larger size, and be able to leverage that to gain better pricing power with department stores.

A similar scenario exists for American Eagle and Abercrombie & Fitch. Both companies are focused on apparel retail, and the target market for the two are teenagers and young adults. Furthermore, Abercrombie’s significantly higher international presence, including its tie-ups with online retailers such as Zalora and Zalando, could be leveraged for American Eagle.

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

Notes:

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap |More Trefis Research