Should Abercrombie Spin-Off Hollister As A Separate Entity?

Abercrombie & Fitch Co. (NYSE: ANF) is a global multi-brand omnichannel specialty retailer, selling its products through its wholly-owned store and direct-to-consumer channels. The company’s business went through a rough patch in early 2017, but A&F has done well to turn things around over recent years. The company implemented a string of changes to improve profitability and the visibility of its brand. This turnaround has been entirely led by its largest brand, Hollister. While the company’s other brand, Abercrombie, has struggled, Hollister has continued to achieve steady growth.

A&F’s situation is quite similar to its peer Gap, which recently announced plans to spin-off its biggest and most profitable brand, Old Navy, into a separate entity. If A&F is unable to revive the fortunes of its Abercrombie brand soon enough, it may have to explore the option of separating Hollister and focusing its efforts on its remaining brand portfolio. Trefis, in the interactive dashboard analysis, How Much Could Hollister Be Worth As A Separate Company?, highlights Hollister’s potential valuation as an independent company. Additionally, you can find more Trefis Textiles, Apparel and Luxury Good Industry Data here.

How has the Hollister brand performed vs the Abercrombie brand?

  Hollister has been responsible for a majority of A&F’s growth

• A&F’s revenues have increased$263 million between 2016 and 2018, growing at an average annual rate of 3.9%.
• However, the Hollister brand alone has added $313 million to the top line at an average annual rate of 8.2%.
• In sharp contrast, revenues for the company’s Abercrombie brand has declined at an average annual rate of -1.7%.

  Hollister’s comparable sales figure has also seen strong growth over recent years

  Comparable sales are a key metric that is used to determine the performance of a company in the   apparel industry.

• Abercrombie’s comparable sales declined by 5% in 2016 while Hollister’s sales declined by 2%.
• Since 2016, this key metric for Hollister has increased at an average rate of 6.5% while growth for the total company has been just 3%.

How has Hollister’s revenue trended over the recent years?

• Hollister’s revenue per square foot has increased from $465 in 2016 to $538 in 2018 as the brand’s revenue has increased while number of stores have remained stable. Moreover, Hollister’s available area per store has gone down as the brand has remodeled or downsized its existing stores.
• Notably, the stores that have been closed were the larger ones under the company’s new prototype format.
• Of late, new stores occupy less space and thus provide a boost to the revenue per sq. foot.

Estimating Hollister’s value as a separate company

• Based on our forecasts for Hollister’s revenues and expenses, we expect Hollister’s Net Income to be around $67 million for 2019 – representing a net income margin figure of just over 3%.
• We value the Hollister brand at about 21x projected FY’19 EPS – higher than Abercrombie’s current trading multiple of 15x, but lower than the industry-average trading multiple of 38x.
• A multiple of 21x has been taken since Hollister is more profitable than the combined company and is poised to achieve strong revenue growth in the near future.
• Using the net income figure of $67 million with our estimated P/E ratio of 21x works out to a valuation of $1.41 billion for Hollister.

How does our valuation of Hollister compare with A&F’s current market cap and our estimate for A&F’s Valuation?

• Abercrombie’s current market cap is around $1.24 billion which is roughly 35% lower than our current valuation of $1.9 billion.
• Hollister’s projected valuation of $1.4 billion represents a figure that is nearly 75% of our forecast for A&F’s valuation.
• Notably, this indicates that A&F can unlock sizable value by potentially splitting into 2 separate companies.

Conclusion: Hollister could be worth $1.4 billion as a separate company

• The Hollister brand has been pivotal to Abercrombie & Fitch’s turnaround in recent years driven by consistent growth across genders and channels. Further, the brand has done well to evolve itself with changing trends and customer preferences.
• With fundamentals for growth remaining strong, we expect Hollister to continue to achieve steady growth for the foreseeable future.
• As detailed above, A&F could benefit by spinning-off Hollister as a separate entity.
• Although there would be duplication costs to run the new company, the benefits appear to outweigh these costs.

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