Good Times Ahead For Abercrombie & Fitch

Abercrombie & Fitch’s (NYSE:ANF) positive momentum in the back half of FY 2017 has continued in Q1 2018, for which the company posted a sales increase of 11%, comparable sales growth of 5%, and a net loss of 56 cents versus 91 cents in the prior year period. ANF’s impressive sales growth was driven by continued strength at Hollister and a 14% increase in direct-to-consumer (DTC) sales. Higher sales, a reduced promotional environment, benefiting from improved consumer confidence, gross margin expansion, and a lower tax rate were the main factors that resulted in the earnings growth. Looking ahead, ANF has improved its guidance for the full year – sales and comps growth are now expected to be 2% to 4%, up from low-single digit growth anticipated earlier.

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.

Factors That May Impact Future Performance

1. Potential of Gilly Hicks: Victoria’s Secret’s loss seems to be A&F’s gain. The former discontinued its swimwear line, and has suffered from a comps decline 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 Kicks brand was relaunched globally at 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 the tremendous growth in this field.

2. Store Closures: 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 50 Hollister stores and 13 A&F stores into the new prototype format. 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. In the first quarter, the company noted that the total square footage was down 3%, and ANF saw a high single-digit improvement in overall real estate productivity. 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.

3. Strong Digital Sales: 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, ANF 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 27% 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. These efforts should ensure a sustained growth in digital sales.

4. Scope For International Growth: 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 increasing penetration, shifting 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.

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