How Has Abercrombie Turned Around Its Business?

Abercrombie & Fitch’s (NYSE:ANF) impressive performance in FY 2017 was a far cry from FY 2016, when for the full year, the company reported a loss of 6 cents per share. The company undertook a massive rebranding initiative after parting ways with its former CEO in late 2014, moving away from the reputation it had built over the past decade. The company’s store count has been reduced, stores now have a smaller footprint with larger fitting rooms, and are integrated with technology. The overpowering perfume, which filled the stores earlier, has also been modified to a fresher, cleaner fragrance. In order to better engage its customers, the company is also improving its social media presence. Additionally, Abercrombie has invested in loyalty programs and developed its direct-to-consumer and omnichannel capabilities. All of these steps have contributed to an improved top and bottom-line.

We have a $26 price estimate for Abercrombie & Fitch, which is slightly higher than the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard to modify the driver assumptions to gauge their impact on ANF’s revenue, EBITDA, or price per share metrics.

Strong Digital Sales Bode Well For The Future

A fundamental shift from brick-and-mortar to the online platform is evident, and retail companies have to embrace this trend in order to remain relevant. In this regard, the company has ensured local and regional fulfillment capabilities across the U.S. and around the globe, as well as supporting 20 websites and 4 apps in 11 local languages. ANF has made a considerable investment, of roughly $400 million since 2010, to ensure the growth of its DTC (Direct To Consumer) segment, and has been rewarded as a result. DTC is now its largest storefront, and constitutes 28% of the company’s sales volume and represented $1 billion in order volume last year. Moreover, mobile plays a huge part in the digital growth, representing 70% of the total DTC traffic.

To better serve the customer’s needs, ANF has been evolving its omnichannel capabilities. Abercrombie’s digital store-centric functionalities such as purchase online, pick up in store, have been driving traffic to stores and as a result, spurring the purchases and productivity within the store. The company has also introduced reserve-in-store that enables customers to try before buying, order-in-store, which displays all of the inventory to customers shopping in the stores, and ship-from-store, which enables ANF to maximize its inventory.

Store Closures A Much Needed Step

Since 2010, over 400 stores have been closed, representing more than one-third of the company’s store count. Further, a significant number have been remodeled or downsized. In 2017, ANF closed 39 stores in the U.S. through natural lease expirations. Moreover, for 2018, 60 more closures are intended, in addition to converting roughly 40 Hollister stores into the new prototype format, including six which will be downsized. Additionally, with about 60% of the U.S. leases expiring by the end of FY 2019, the company has significant flexibility to find the right store count balance, and drive efficiency by remodeling or resizing the stores, renegotiating leases, or shuttering some. The company feels it can drive greater store productivity through an “enhanced store experience on a smaller footprint.” In theory, the company’s comparable sales should show an improvement when the unprofitable stores are closed down, particularly with a greater focus placed on the online segment. Furthermore, the revenue per square foot should increase with stores being downsized.

While the company has been focusing on right-sizing its store footprint in North America, it is dependent on the international markets for growth through expansion. In Europe, the company sees a $1 billion opportunity across all channels. At present, the company has a modest 117 stores in the region. Consequently, its focus in the region is on increased penetration, shift to smaller, more productive stores, and building a more local customer base. The company’s partnership with wholesalers, like ASOS, NEXT, and Zalando, should ensure online sales growth. In China, the company estimates a $500 million opportunity. The company currently has only 28 stores in the country, and is focusing on growing its digital business, through its partnership with Alibaba, as well as its store count to address this opportunity.

Improving Economic Conditions Help Abercrombie

The improvement in ANF’s performance, however, cannot be attributed to company-specific factors alone, as it is not the only player in the retail industry that has shown strength in recent months. Companies such as Gap and Urban Outfitters also posted a recovery in 2017, spurred by an improving economy. With unemployment rates at their lowest levels since February 2001, and consumer confidence on a high, the retail sector was bound to be a beneficiary.

See our complete analysis for Abercrombie & Fitch

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs

For CFOs and Finance Teams | Product, R&D, and Marketing Teams

More Trefis Research

Like our charts? Explore example interactive dashboards and create your own.