Abercrombie & Fitch Looks To The East For Growth

Abercrombie & Fitch (NYSE:ANF), known earlier for its topless models and sexualized advertising, is delving deeper into the Middle East in its search for growth. The brand, in December 2015, announced the opening of its first store in the UAE, in one of Dubai’s luxury shopping centers. This was opened pursuant to a joint venture with Majid Al Futtaim Fashion, that works with a number of leading fashion brands across the Middle East, Africa, and Asia. In conjunction with this partnership, the company is opening its first store in Saudi Arabia in September 2017, in the Red Sea Mall in Jeddah. This marks the company’s sixth A&F store in the Middle East in partnership with Majid Al Futtaim, along with three abercrombie kids stores, which are operated in a mix of franchise and joint venture agreements.

Demand Continues In The Region

Following the success of its first store in Dubai, the company opened several more in the region, and the count now totals nine, with six in Dubai, two in Kuwait, and the latest in Saudi Arabia. As per Arthur Martinez, chairman of Abercrombie & Fitch, while the company does not have a firm plan in place, it would not be a surprise if the store count doubled in the next three to five years. The company expects to open more stores in the region, with plans to eventually expand the brands into Bahrain and Oman. The franchise agreement encompasses the Abercrombie & Fitch, abercrombie kids, and Hollister brands. Significant growth is expected from the region through the company’s target market – teenagers and consumers in their 20s, as there is a fairly large young population. While Hollister appeals primarily to teenagers, the Abercrombie & Fitch brand has been trying to push its target market towards the older segment, towards those in the 20 to 29 range.

International Expansion An Avenue Of Growth For ANF

This certainly seems like an attractive opportunity, as the company has been struggling with its performance in the domestic market. While it is clearly not a doubt that the company has too many stores in the US, where it has been shutting them down aggressively, the brand has room to grow internationally. Currently, the company attains over one-third of its revenues from outside the US, with Europe being its largest international market. Even in terms of sales per square foot, the company is far more productive internationally, than it is in the US. Aggressive expansion in Europe cost the company, as an unplanned policy resulted in a high concentration of stores in a few tourist destinations, ultimately causing cannibalization of its own sales. Furthermore, lingering economic weakness in the region further put a stop to growth for the company. Focusing instead on other international markets such as those in Asia, the Middle East, and Australia, may prove to be more beneficial for the company.

As can be seen from the above table, the share of US as a source of revenue for Abercrombie & Fitch has remained constant. However, its share from Europe has decreased 300 basis points. Between 2010-2012, Abercrombie expanded aggressively in the market, increasing its total international store count from 52 to 139. However, the retailer did not plan its expansion well, which resulted in a high concentration of stores in a few tourist destinations. This caused Abercrombie eating into its own sales, which has troubled it to date. In addition to self-cannibalization, lingering economic weakness in countries such as France, Italy, and Germany (Abercrombie’s main markets in Europe) contributed to the company’s under-performance. An unsettled environment in the region has largely been a result of a weak currency and lower tourism.

Lately, Abercrombie has shown some latent signs of recovery, driven by better-than-expected results in the U.K. and Germany, but it hasn’t been able to improve its performance across the board. The best opportunity for the company, thus, lies in the ‘Other’ category, specifically the Middle East and Asia. The company has opened ten stores in China, where there is an expanding middle class, and a growing appetite for western brands. ANF also has a presence on Tmall, China’s largest consumer platform for brands and retailers, which has 454 million annual active buyers. Elsewhere in the region, ANF has partnered with Zalora, Asia’s leading online fashion website, which has a presence in 11 countries, including Singapore, Indonesia, Malaysia, the Philippines, Hong Kong, and Taiwan, and a customer base of over 600 million users. Such moves may provide a boost to the company’s revenues as it tries to deal with the soft state of the apparel market in the US.

See our complete analysis for Abercrombie & Fitch

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

• Hollister Helps Abercrombie Beat Estimates
• 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?

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