Abercrombie & Fitch
) continued its good performance in the fourth quarter of fiscal
2012. The retailer's revenues increased by 11% due to a weak
comparable period and growth in its direct-to-consumer business.
With better control over the inventory, Abercrombie was able to
reduce the number of markdowns, which helped its sales and gross
margins. In addition to this, the consolidation of the retailer's
ANF stores in the U.S. and its strategic expansion in European
markets helped its results in these two regions. Also,
Abercrombie's performance during the holiday season remained steady
with positive comparable store sales growth.
See our complete analysis for Abercrombie &
Direct-To-Consumer Business Remains The Key
The apparel industry is on the mend with major players such as
), American Eagle Outfitters (
) and Gap (
) benefiting from growth in the direct-to-consumer channel. For
Abercrombie, this is the fastest growing and the most valuable
segment. The retailer's direct-to-consumer revenue growth averaged
nearly 35% annually during 2010 and 2011. The momentum continued in
Q4 fiscal 2012 as revenues grew by 26% and comparable sales were
Despite a weak holiday season in the U.S., direct business'
comparable sales growth remained strong during November-December.
The growth was not just limited to the U.S. Over the last two
quarters, Abercrombie's international direct-to-consumer revenues
have increased by 30% on average with Europe being the strongest
despite weak economic conditions.
Lower Inventory Carryover Helping The Margins
Abercrombie has faced difficulty in managing its inventory in
the recent past. This resulted in excessive promotional discounts
leading to a decline in average prices. This not only impacted the
comparable store sales but also weighed on the retailer's margins.
In Q3 fiscal 2012, Abercrombie started responding to this
problem by increasing its inventory at a much slower pace than the
sales growth. The retailer continued this in the fourth quarter
with a low carryover of fall inventory.
In Q4 fiscal 2012, the retailer's inventory was 35% lower than
it was a year ago. This helped Abercrombie in reducing the number
of markdowns, which helped improve average prices for sales items
and margins. Complemented by lower production cost, Abercrombie's
gross margins for the quarter improved by 920 basis points in
comparison to Q4 fiscal 2011. From a long term perspective, tight
inventory control will help Abercrombie achieve steadier
Consolidation Of ANF Stores In The U.S. Increasing Store
Abercrombie has been consolidating its under-performing ANF
stores in the U.S. to improve store productivity. This has helped
the retailer in the past as its revenue per square feet increased
from $440 in 2008 to $500 in 2011, while the store count has come
down from 358 to 310. Complemented by the consolidation strategy,
the U.S. business has registered positive comparable sales growth
in the past 12 consecutive quarters. Abercrombie plans to further
close down 50 stores in the U.S. across all its brands in fiscal
Emphasis On Improving Brand Popularity Should Help In
In August 2012, the retailer launched a loyalty club program for
its ANF brand that offers discounts, gift certificates and other
rewards. Moreover, it provides free shipping for online orders, and
access to exclusive music videos and photo galleries on its
website. In the initial stages of this program, more than 750,000
customers signed up and started buying more than the
regular customers. Towards the end of the fourth quarter, this
figure increased to more than 1.5 million. This is in addition to
3.5 million existing customer contacts. Such programs and
promotions will help Abercrombie in competing in a highly
competitive U.S. apparel industry.
Improving International Results Driven By Strategic
Abercrombie started to show some improvements in Europe as
comparable store sales fell 2% in Q4 vs. -18% in Q3. The silver
lining was that Abercrombie's stores in Scandinavia, Belgium and
Spain continued performing well and generated positive comparable
sales in this quarter. We believe that Europe holds good potential
for the retailer once the economy recovers.
Our price estimate for Abercrombie & Fitch Stands at $51,
implying a premium of less than 10% to the market price.
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