Hollister And The DTC Segment To Help Tide Over A Tough Second Quarter For Abercrombie

After a mixed couple of weeks for retail companies, it’s Abercrombie & Fitch‘s (NYSE:ANF) turn to report its second quarter earnings. Given the weakness in the apparel retail market, as well as the poor past performance of the company, a decline in revenues is expected this time around as well, with an EPS of $-0.33 predicted. Teen apparel companies have suffered tremendously with the rise of the Amazon giant, and the decline of mall traffic. To cope with this, these companies have been focusing on their online channel, which has been pressuring the margins. A promotional environment and store traffic headwinds are an industry-wide headache, and ANF is no exception. Excessive discounting has also wreaked havoc on the gross margins, which were 130 basis points lower in Q1 than in the corresponding quarter last year. Below we’ll highlight some factors that may have an effect on Abercrombie’s earnings.

Focus On DTC Channel

CEO Fran Horowitz has been working hard 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.

On a more sobering note, A&F’s sales slide has been going on for a while now, with the brand struggling to attract customers. A&F has not been able to overcome the challenges posed by the apparel market, which has resulted in a slower than expected progress of the brand revitalization plans. The company’s flagship and tourist stores have weighed heavily on the results, as a result of the persisting traffic headwinds, a trend which is expected to continue in the second quarter as well.

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, on April 10, announced a partnership with online fashion retailer Zalora, that has a presence in 11 countries, including Singapore, Thailand, Indonesia, Hong Kong, and the Philippines. Such an agreement gives Abercrombie access to Zalora’s 600 million online customers, located mainly in Southeast Asia, where the company does not have much of a 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 which 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 over 18 million active customer base. 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.

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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