Abercrombie’s Stock Plummets As Merger Talks Fail

Shares in Abercrombie & Fitch (NYSE:ANF) fell 21% on Monday when the company announced that deal talks were off, confirming an earlier report by the Wall Street Journal. The company had announced in May that it was exploring the possibility of a sale, after receiving expressions of interest. This had attracted the interest of a number of suitors, including American Eagle, which teamed up with private equity firm Cerberus Capital Management. However, after reviewing all relevant factors the company decided to go it alone, and stated that the best way forward was “the rigorous execution” of its business plan. What has led to this, and what comes next for Abercrombie? Below we’ll try to answer these questions.

Dearth Of Shoppers In Brick-And-Mortar Stores

Apparel retailers, in particular teen retailers, have been hit hard in recent times. It is common knowledge now that millennials just don’t want to go to malls. With growing internet penetration and the proliferation of smartphones, there has been a consistent shift from in-store shopping towards the online channel. The smartphone usage is only going to grow in the future, seemingly sounding the death knell for the traditional apparel retail industry. Furthermore, with the rise of fast-fashion retailers such as H&M, Zara, and Uniqlo, who are able to move styles from the runway to the stores within weeks, constantly evolving their assortment and keeping their products fresh, another threat looms over this industry.

Such a state of affairs has battered the apparel retail sector, which has been hit hard with a spate of bankruptcies and store closures. True Religion became the latest casualty, as it filed for bankruptcy, and intends to close at least 27 of their 140 stores in the US. More than 300 retailers have filed for bankruptcy this year, according to date from BanruptcyData.com, a rise of 31% from last year. While most of these are small stores, there are some big names in the list, including Gymboree, Payless ShoeSource, Rue21, RadioShack, Wet Seal, and The Limited. In such a situation, Abercrombie’s declining sales and earnings can not come as much of a shock. The company’s apparels no longer stand out in a crowded teen fashion field. In such a market, a company on a downward spiral will anyway find it hard to sell itself at any sort of premium. Not only that, a prospective buyer would have to spend considerable time and resources to turn its fortunes around. Besides the money it would spend to acquire ANF, it would also need to expend resources to come up with an effective turnaround strategy, and wait for its strategy to come to fruition before it can expect any sort of return.

Focus On Hollister In The Future

Abercrombie has in the past taken a number of steps to turn around its business. However, most of these do not seem to have worked. What has worked is the company’s strategy with Hollister, which has performed well, despite a challenging retail environment. During FY 2016 (year ended January 2017), ANF converted 65 additional Hollister stores into a 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. Hollister is also the more affordable brand of the company, and targets teen shoppers.

Another area of focus for the company should be its direct-to-consumer (DTC) channel, which contributed to 27% of the company’s sales in the first quarter. Keeping the shift to the digital space 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. ANF has also tied up with a number of online retailers such as Zalora and Zalando, to target the Southeast Asian and European markets, respectively. Tying up with such retailers will give a boost to the company earnings, as it would result in increased revenues, without the added costs associated with it.

Meanwhile, the company has stated its intentions revitalize the performance of its eponymous brand as well. The company has undertaken a number of store closures in order to shut down the unprofitable stores and rationalize its store base. In theory, the company’s comparable sales should show an improvement when the unprofitable stores are closed down. However, till now, this strategy has failed to show any improvement in the sales. Whether the company is effective in turning around its Abercrombie brand remains to be seen.

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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