Improving Comps Drives Growth For Abercrombie In The Third Quarter
The retail sector has been buoyed with the improving results seen at companies such as Gap, Foot Locker, and Wal-Mart. Abercrombie & Fitch (NYSE:ANF) was another such retailer that posted strong gains as it carried on with the momentum it has built up recently, posting a beat on both revenue and consensus estimates. Its shares were up close to 24% after its earnings release. The impressive performance was shored up by the 4% comparable sales growth for the company, which thumped the 0.3% gain expected. The shift towards online and fast-fashion stores have hit a number of teen-retailers, including Abercrombie. In response to this, the company has implemented a bevy of changes to turn around its fortunes and revamp its image. Abercrombie also expects a strong holiday quarter, with comps slated to increase in the low single digits, to close out the year on a high. Below we’ll highlight some growth drivers for Abercrombie.
We have a $12 price estimate for Abercrombie & Fitch, which is now below the current market price.
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1. Direct-To-Consumer (DTC) Segment
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 company reported an 11% growth in this segment this quarter, with a majority of the growth coming from mobile. This implies that the company’s significant investments into mobile are paying off, as more than two-thirds of the DTC traffic comes from this platform. Abercrombie’s digital store-centric capabilities such as purchase online, pick up in store, which witnessed a 75% growth this quarter, have been driving traffic to stores and, as a result, been spurring the purchases and productivity within the store. DTC has grown to 24% of the company’s business, up from 23% last year. The company has a robust omnichannel functionality in markets such as the US, Canada, and the UK. These capabilities are being introduced in its other markets as well, which is a necessary area of focus for driving international growth.
2. Hollister
Hollister has continued to perform strongly amid a tough retail environment. The brand built on the momentum it had gathered in the past few quarters, growing its comps by 8% in the third quarter. While A&F’s comps are improving sequentially, they are still in the negative territory. As can be seen in the chart below, the third quarter of FY 2016 seems to be the turning point for the comps. While Hollister’s recovery started in the quarter prior, for the namesake brand and the whole company, the comps have trended better since Q3. Changes to the assortment have been a factor driving the growth at Hollister, as well as its lower-priced products as compared to A&F. Its Club Cali loyalty program continues to do well, and attract new customers. The program has grown to over 8 million customers by the quarter-end, who get to make use of the member-only events.
3. Online Partnerships
Abercrombie has partnered with online retailers such as Zalando and Zalora, to get access to their customer base in Europe and Southeast Asia, respectively. Since every sale through these websites 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 existent in these regions, and hence, a presence on the websites will not result in cannibalization. The company also last quarter launched Abercrombie & Fitch and Abercrombie Kids on Alibaba’s Tmall platform. The success of Hollister on this platform for the past three years prompted ANF to showcase its other brands as well, and this move helps to leverage the strong digital growth in China.
4. Intimates & Swimwear
Victoria’s Secret’s loss seems to be A&F’s gain. The former discontinued its swimwear line and has suffered from comp declines ever since. Abercrombie, on the other hand, witnessed aggressive growth in its Swim and Intimates line, with Gilly Hicks continuing to attract new customers to the Hollister brand. The Gilly Hicks brand was relaunched globally in the beginning of 2017 and seems poised for success in the future. Even for American Eagle, its lingerie and activewear brand, Aerie, has been its best-performing segment for a while now, demonstrating tremendous growth in this field.
See our complete analysis for Abercrombie & Fitch
Have more questions about Abercrombie & Fitch? See the links below:
- Apparel Retail Companies: Surviving The Holidays 101
- Abercrombie & Fitch Looks To The East For Growth
- 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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