What To Expect From Abercrombie & Fitch In Q4

Abercrombie & Fitch (NYSE:ANF) had a fairly decent first three quarters of 2018, as the company managed to grow its revenue by just under 6% in the first 9 months of the year. This performance was primarily attributable to immense improvement in the digital segment, coupled with solid comps growth for its Hollister brand. We expect these trends, coupled with the holiday season, to drive its Q4 results, partly offset by below-par performance from its Abercrombie brand. For the fourth quarter, ANF expects net sales to be down mid-single digits as a result of the adverse effect of the calendar shift and reduction in anticipated foreign currency benefits. As a result, we expect the company to report a somewhat mixed quarter when it reports its Q4 results on March 6. Below we take a look at what to expect from ANF’s Q4.

We have a $23 price estimate for Abercrombie & Fitch’s stock, which is slightly higher than the current market price. Our interactive dashboard on what to expect from ANF in Q4 details our expectations for the company’s earnings. You can modify the charts in the dashboard to gauge the impact that changes in key drivers would have on the company’s earnings and valuation, and see all of our Consumer Discretionary company data here.

Factors That May Impact Future Performance

1. Potential of Gilly Hicks: Abercrombie has 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 at the beginning of 2017, and seems poised for success in the future.

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 2018, the company expects to close roughly 40 stores (down from the previously expected figure of 60) and expects to convert roughly 50 Hollister stores and 13 A&F stores into the new prototype format. Furthermore, with about 60% of its U.S. leases expiring by the end of FY 2019, the company has substantial flexibility to find the right store count balance, and drive efficiency by remodeling or resizing the stores, renegotiating leases, or shuttering some. In addition, ANF 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. Further, the company’s revenue per square foot should increase with stores being downsized.

3. Strong Digital Sales: Growth in e-commerce highlights the fundamental shift from brick-and-mortar to the online platform, 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. Consequently, the company has consistently invested to grow its DTC (Direct To Consumer) segment, and has been rewarded as a result. DTC is now its largest storefront, with mid-double-digit growth through the first three quarters of 2018, and constitutes to approximately 28% of the company’s sales volume. Moreover, mobile plays a huge part in digital growth, representing about 75% of the total DTC traffic. Further, ANF’s sustained efforts to evolve its omnichannel capabilities, store-centric functionalities, and inventory optimization should drive more traffic to the stores and ensure increased purchases. These efforts should ensure 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 expects growth from international markets through expansion. In Europe, the company sees a $1 billion opportunity across all channels. At present, ANF has a modest 120 stores in the region. As a result, its focus in the region is on increasing penetration, shifting to smaller, more productive stores, and building a more local customer base. In addition, its 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.

5. Hollister Growth Remains Strong: The Hollister brand has been the silver lining for Abercrombie & Fitch in recent years, with consistent growth across genders and channels. The brand posted 4% improvement in its comps in Q3, its eighth consecutive quarter of growth in the metric, driven by better than expected sales in jeans, activewear, swim, and intimate. Further, the brand also launched several marketing campaigns and programs to not only better understand the ever changing trends and preferences, but also remain close to its core audience. We expect these initiatives to benefit the brand and drive solid medium term growth.

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