Did Hollister Drive Profits At Abercrombie & Fitch’s In Q1?

Abercrombie & Fitch (NYSE: ANF) is set to announce its first quarter results on May 29, followed by a conference call with analysts. The clothing retailer is expected to post a quarterly loss of $0.43 per share, which represents a year-over-year improvement of 23.2% while revenues are expected to slightly marginally to $733.5 million. The improvement in earnings are expected to be driven by sales growth in the Hollister brand as well as expansion in the company’s digital segment.

Per Trefis estimates, Abercrombie’s shares have a fair value of $29 which is about 15% ahead of the current market price. We have summarized our key expectations from the earnings announcement in our interactive dashboard – How Is Abercrombie & Fitch Likely To Have Fared In Q1?  In addition, here is more Trefis Textiles, Apparel and Luxury Good Industry Data.

A Quick Look at Abercrombie & Fitch’s Revenue Sources

Abercrombie & Fitch reported $3.6 billion in Total Revenues in Fiscal 2018. This included 2 revenue streams:

• Abercrombie: $1.4 billion in FY 2018 (40% of Total Revenues). This brand is a specialty retailer of high-quality apparel and accessories for men and women.
• Hollister: $2.2 billion in FY 2018 (60% of Total Revenues). Hollister is focused on teens globally and also includes the intimates brand, Gilly Hicks.

Key Factors To Watch for In Q1

Digital Sales Will Continue To Augment The Company’s Growth

• The growth in e-commerce has resulted in a fundamental shift from brick-and-mortar to the online platform over the last decade, and retail companies have been forced to embrace this trend in order to remain relevant. At the same time, digital and in-store shopping are also becoming increasingly integrated. ANF has invested heavily in growing its Direct to Consumer (DTC) segment, as the company shifts its focus to digital sales from physical store sales. The company’s strategy is yielding results, as evidenced by the fact that digital sales exceeded $1 billion in 2018 – roughly 35% of total sales volume. We anticipate the DTC segment to be the key driver of the company’s top line in coming years.

Hollister Growth Likely To Remain Strong

• The Hollister brand has been pivotal to Abercrombie & Fitch’s turnaround in recent years, led by consistent growth across genders and channels. The brand posted a 6% improvement in its comps in Q4 (its ninth consecutive quarter of growth in the metric) driven by better-than-expected sales across product categories. Further, the brand has done well to evolve itself with changing trends and customer preferences.
• The company’s Swim and Intimates line, Gilly Hicks, continues to attract new customers to the Hollister brand. Moreover, the company’s new spot offerings at Gilly Hicks have aided the brand’s growth. Taking all this into account, we expect the Hollister brand to continue to drive a bulk of the company’s growth over the foreseeable future.

Company Likely To Benefit From Its Loyalty Program

• Abercrombie’s loyalty program grew significantly in 2018, with its total member count reaching 28 million while its Awesomeness TV series generated more than 21 million YouTube views. Also, the company’s focus on its loyalty program and marketing campaign has helped it achieve positive cross-channel traffic comp.
• The company plans to leverage the data collected through its loyalty program to engage with its customers better on a personalized level, which in turn should help the company to improve its customer retention ratio. We expect the company to invest more in this program and improve its customer engagement across markets.

Impact Of Tariffs On China Production

• To minimize the impact of tariffs imposed by the U.S. on China, Abercrombie plans to cut down production in China to 20% in 2019 and also intends to slash the amount of China-sourced goods flowing into the U.S. by half in the near future. This is likely to elevate the company’s operating expenses, which should hurt the company’s bottom-line.
• However, the company continues to see strong demand for its retail products in China and the tariffs are unlikely to have any material impact on the company’s retail segment products.

Trefis Price Estimate

• Based on our forecast, Abercrombie & Fitch’s EPS for full-year 2019 is likely to be around $1.23. Using this figure with our estimated forward P/E ratio of 23x, this works out to a price estimate of $29 for the company’s shares, which is about 15% ahead of the current market price.

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