Why Abercrombie & Fitch’s Plan To Reduce Store Closures Makes Sense

During its third quarter earnings conference call, Abercrombie & Fitch’s (NYSE:ANF) CEO Fran Horowitz stated that the company expects to close up to a total of 40 stores in FY 2018 (year ended January 2019), less than the 60 that had been previously expected. The retailer witnessed slight growth in sales in the third quarter, compared to an expected decline. Comparable sales were up 3% in Q3, beating consensus estimates of 1.6% growth, led by immense improvement in the digital segment, which grew 16%. Moreover, the company’s management reported that the momentum has carried over into the fourth quarter, with a strong start noted in the holiday season, with strong double-digit growth on singles day on T-Mall and a record performance for the peak period from Thanksgiving Day to Cyber Monday. On the other hand, analysts surveyed by FactSet were anticipating a 0.1% decline. These two factors – the sales growth and improved holiday outlook – are likely the main factors prompting the company to scale back its planned store closures.

We have a $23 price estimate for Abercrombie & Fitch, which is higher than the current market price. The charts have been made using our new, interactive platform. Our interactive dashboard on Estimating Abercrombie & Fitch’s Fair Price details our forecasts and estimates for the company. You can modify any of our assumptions to gauge the impact of changes on ANF’s revenue, earnings, or valuation.

In-Store Experience Remains Important For The Digital Segment

To ensure sustained digital growth, 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. Moreover, mobile plays a huge part in digital growth, representing over 75% of the total DTC traffic. To better serve customer needs, ANF has been evolving its omnichannel capabilities and has introduced Venmo as a payment option. Abercrombie’s digital store-centric functionalities such as purchase online, pick up in store, have been driving traffic to stores, consequently spurring purchases and productivity within the store. The company has also introduced reserve-in-store, which 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 optimize its inventory.

Black Friday Traffic Trends Show Only A Marginal Decline

Black Friday, the busiest holiday shopping day in the U.S., is now behind us, and with shopper traffic data streaming in, we can safely say that physical retail is still very much alive. There has been a significant amount of talk signaling the death knell for brick-and-mortar stores as a result of the rise in e-commerce and a change in consumers’ shopping habits. Furthermore, the presence of the Amazon giant is ever-looming over the industry. However, news that should bring holiday cheer to the sector is that for the third year in a row, Black Friday brick-and-mortar retail traffic has held somewhat steady, as ShopperTrak data shows just a -1.7% year-on-year decline in shopper traffic numbers. Apparel companies have had to adapt to the digital marketplace, with many who have failed to embrace the integrated omnichannel environment suffering as a result. Another factor that will bode well for traffic trends in brick-and-mortar stores this holiday season is that for the third consecutive year, there are four Saturdays in December prior to Christmas.

Significant Number Of Store Closures Already Undertaken, Downsizing Makes Sense

Since 2010, over 450 ANF 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. For 2018, 40 closures are planned, in addition to converting roughly 50 Hollister stores and 13 A&F stores into the new prototype format. Moreover, with about 60% of the U.S. leases expiring by the end of FY 2020, 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 is also shifting from large-format and its flagship stores to smaller, mall-based stores. The company noted that over the past two years, the total square footage was down 7%, and ANF saw a mid-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. Additionally, the revenue per square foot should increase with stores being downsized.

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