Why Abercrombie’s Future Growth Prospect Hinges Almost Entirely On Hollister

Abercrombie & Fitch’s (NYSE: ANF) 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 led entirely by its largest brand – Hollister. While the company’s core Abercrombie brand has struggled, Hollister has grown considerably to become the most important brand of the company. Trefis highlights the importance of Hollister for Abercrombie & Fitch  in an interactive dashboard, parts of which are summarized below. You can modify any of our key drivers to gauge the impact changes would have on Abercrombie’s valuation. Additionally, you can find more Trefis Textiles, Apparel and Luxury Industry Data here.

Why Is Hollister The Core Of Abercrombie & Fitch’s Business Model?

#1 Hollister Contributes More Than 60% Of Abercrombie’s Revenues

• Hollister has been ANF’s fastest-growing brand. Hollister has added $313 million to the company’s top line since 2016 at an average annual rate of 8.2%.
• As a result, Hollister’s contribution to Abercrombie’s total revenues has increased from 55% in 2016 to 60% in 2018.
• This growth has been driven by strong performance across genders and channels. Moreover, the brand has continued to benefit from a growing customer base for its swimwear and intimates categories.
• We expect the brand to continue to achieve steady revenue growth and report a record $2.2 billion in revenues in FY 2019.

#2 Notably, the contribution of the biggest brands to the top line of Abercrombie’s competitors is lower, and ranges from 40% to 55%

• Data around trends in contribution of their biggest brand to the top line of competitors Gap, L Brands and Urban Outfitters is available in our interactive dashboard.

#3 Hollister Has Been The Lone Bright Spot For Abercrombie Over Recent Years

• Abercrombie has added $263 million to total revenue since 2016 at an average annual rate of 4%.
• On the other hand, Hollister alone added $313 million to Abercrombie’s total revenue at an average annual rate of 8%.
• In sharp contrast, the company’s cornerstone brand, Abercrombie, has lost nearly $50 million in total revenues since 2016

#4 Hollister Has Achieved Strong Comparable Sales Growth Over The Last Couple Of Years

• After delivering a flat comparable sales growth in 2016, Hollister has seen decent success in last couple of years, with the brand achieving comparable sales growth of 8% and 5% in 2017 and 2018, respectively.
• On the flip side, Abercrombie’s comparable sales growth dived by 5% in 2016 before recovering to achieve a growth of 3% over 2017-18. Hollister has comfortably outpaced the company’s growth led by strong sales across all product categories.

Conclusion

• Hollister is Abercrombie’s largest and fastest growing brand of – contributing a bulk of the company’s growth.
• With growth fundamentals remaining strong for the brand, we expect Hollister to be pivotal for the company’s long-term revenue growth, profitability improvement,  and enhanced shareholder returns in the coming years.
• Further, the brand has done well to evolve itself with changing trends and customer preferences.
• Moreover, the company’s core brand, Abercrombie, has struggled over the last couple of years – increasing the importance of the Hollister to Abercrombie & Fitch’s long-term growth.
• Hence, it would be no surprise if the company follows in the footsteps of its peer Gap,  and spins-off its biggest and most profitable brand, Hollister, into a separate entity – a scenario we explore in detail in our interactive dashboard.

Starting with our forecast for Abecrombie’s revenues as detailed above, we estimate the company’s adjusted EPS for full-year 2019 is to be around $0.63. Using this figure with our estimated forward P/E ratio of 32x, this works out to a price estimate of $20 for Abercrombie’s stock.

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