Is Abercrombie Attractive At Its Current Valuation?

Shares in US retailer Abercrombie & Fitch (NYSE:ANF) have been trading at their lowest level since 2000. The stock price has been trending downwards for a number of years, reflecting the poor sales and earnings generated by the company. Once news surfaced on May 10 that the company is fielding interest, and is in “preliminary discussions with several parties regarding a potential transaction with the company,” the stock spiked 12%. Following this, speculation has only risen regarding a potential merger, with American Eagle, together with Cerberus Capital Management, emerging as a frontrunner. However, even this euphoria has died down and the stock price has given back all of its gain, despite reports even suggesting the deal could be through by month-end. Below we’ll highlight some factors that could result in another upswing in the company’s stock price.

Focus On DTC Channel

Amidst the news that Abercrombie is fielding takeover interest from prospective buyers, including American Eagle, CEO Fran Horowitz is looking to fix the company’s operations. One avenue of long-term growth is the company’s online business. A fundamental shift from brick-and-mortar to the online platform is evident, and retail companies have to embrace this trend in order to be relevant. Keeping this in mind, ANF has integrated its Abercrombie and kids websites, and optimized it for mobile, payment, and tracking. The full omnichannel offering has been rolled out in the US, Canada, and the UK, with plans to roll-out internationally through the remainder of 2017. The focus on its digital presence has been appreciated, with Abercrombie coming in at fourth in a ranking of 100 publicly traded retailers having an omnichannel presence, conducted by Total Retail.

Reduced store traffic necessitates the existence of a seamless omnichannel presence. In this regard, ANF has undertaken substantial effort and investment, which seems to be paying off, as DTC (Direct-to-Consumer) revenues increased to constitute 27% of the total revenues in the first quarter of 2017, up from 24% in the corresponding period of last year.

Performance of Hollister

Hollister performed well for the company in the last reported quarter despite a challenging retail environment. 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. The company also successfully rolled out its Hollister Club Cali loyalty program in the US. Based on the positive outcome of these two initiatives, the company has decided to implement them for the Abercrombie brand as well.

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.

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.

Besides the aforementioned factors, once a more certain deal emerges, the stock price could potentially shoot up. A bid for the company will  possibly be above the current trading price, which would push the stock higher. However, A&F itself has said that there is no guarantee of a deal even materializing. Hence, buying the stock would make more sense if it is done based on its underlying potential.

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