Can Abercrombie Reverse Declining Fortunes For Its Core A&F Brand In 2019?

Abercrombie & Fitch’s (NYSE: ANF) total revenue for fiscal 2018 (ending February) grew 3% year-over-year to $3.6 billion with the company reporting its highest net income figure in six years. 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. This turnaround has been entirely led by its largest brand, Hollister. Trefis captures trends in Abercrombie & Fitch’s Revenues in an interactive dashboard along with our forecast for the current year. We believe that the company will add roughly $40 million in total revenues in FY’19, with Hollister more than making up for an expected decline in sales for the flagship Abercrombie brand. You can alter the assumptions in our dashboard to arrive at your own estimate for the company’s revenues. Additionally, here is more Trefis Textiles, Apparel and Luxury Good Industry Data .

Understanding ANF’s Business Model:

1. What Does Abercrombie & Fitch Offer?

• Abercrombie: This brand is a specialty retailer of high-quality apparel and accessories for men and women. This also includes the Abercrombie kids brand
• Hollister: This brand caters to the need of teenagers. Hollister is focused on teens globally and also includes the intimates brand Gilly Hicks.

2.Who Are The Clients?

Abercrombie is primarily responsible for supporting customers using branded performance apparel, footwear and accessories.

3. What Are The Alternatives?

Abercrombie’s business model faces stiff challenges and competition from offerings by its global competitors such as: American Eagle Outfitters, Gap Inc, Ralph Lauren. The Company operates in a rapidly evolving and highly competitive retail business environment. Competition is primarily on the basis of quality, fashion, brand experience and selection

How Has Abercrombie’s Revenues Trended Over Recent Years?

• Abercrombie has added more than $260 million to total revenue since 2016 at an average annual rate of 3.9% led by sales growth in the Hollister brand as well as expansion in the company’s digital segment.
• Hollister brand has been the primary contributor to Abercrombie’s revenue growth. While the company’s Abercrombie brand has struggled, Hollister has continued to achieve steady growth.
• Going forward, we expect Abercrombie to achieve minimal revenue growth, with the company’s revenue growing by just 1% to $3.63 billion in FY 2019

Forecasting Abercrombie’s Revenues by Segment

Abercrombie & Fitch’s Entire Revenue Growth Will Be Driven By Its Hollister Brand

• Hollister has added $313 million to the company’s top line since 2016 at an average annual rate of 8.2%.
• The brand consistently contributes a majority of its revenues, with an average revenue share of roughly 58% in the last 3 years.
• The segment’s contribution to total revenues has significantly increased over the years – a trend which is expected to continue in the foreseeable future.
• The segment grew by 5.6% year-over-year in fiscal 2018, contributing more than $110 million to total incremental revenues. Additionally, Hollister’s revenue per square foot has increased from $465 in 2016 to $538 in 2018.
• We expect the brand to continue to achieve steady revenue growth and report a record $2.2 billion in revenues in FY 2019.
• This growth is likely to be driven by strong performance across genders and channels. Moreover, the brand should benefit from a growing customer base for its swimwear and intimates categories

Abercrombie Brand Will Continue To Struggle

• Abercrombie has lost more than $200 million in total revenue since 2015, declining at an average annual rate of 4.3%
• However, the brand’s revenue per square foot has increased from $487 in 2016 to $540 in 2018 as the brand shuttered a number of its stores.
• The brand has struggled due to slow traffic trends seen in its flagship and tourist locations stores as well as stiff competition from fast-fashion retailers, such as Zara and H&M.
• Moreover, the brand’s inability to adapt to the changing consumer preferences and habits has adversely impacted performance.
• We forecast another difficult year for the brand, with revenues declining by 1% to $1.42 billion in FY 2019.
• Additionally, the segment’s contribution to total revenue has steadily declined over the years, which is expected to continue over the foreseeable future.

Based on our forecasts, Abercrombie’s adjusted EPS for full-year 2019 is likely to be around $0.63. Using this figure with our estimated forward P/E ratio of 31x, this works out to a price estimate of $20 for ANF’s stock

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