Fiscal 2013 Will Be A Dismal Year For Abercrombie & Fitch

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Last year, when most apparel retailers in the U.S. were performing well, Abercrombie & Fitch ( ANF ) struggled with its growth due to inventory management issues. This problem continued in the first quarter of fiscal 2013, as the retailer's inventory levels dipped too low, leaving it with less to sell. Although the company was in a better inventory position in the second quarter, its growth stumbled due to the apparel industry weakness arising from cautious consumer spending. Following these results, Abercrombie slashed its guidance for Q3 and stated that it was uncertain about the fourth quarter.

Abercrombie's sales in the third quarter will mostly depend on the industry trends, which do not seem too positive. The National Retail Federation had predicted a weak back-to-school season this year and the trends have confirmed the forecast so far. An early forecast by ShopperTrak suggests that the holiday season this year will see its weakest gains since 2009. This is not a good sign for Abercrombie, and hence, we expect its troubles to continue throughout the fiscal 2013.

Our price estimate for Abercrombie & Fitch stands at $42.5 , implying a premium of about 30% to the market price.

See our complete analysis for Abercrombie & Fitch

Inventory Shortage Weighed On The First Quarter Results

Last year, Abercrombie's growth remained weak due to its tough run with inventory management. The retailer's warehouses had significant surplus inventory, which prevented the launch of new fashion and weighed on the comparable store sales growth. In response, Abercrombie started making some valuable efforts for better inventory control such as sourcing goods from within U.S.  While the company managed to pull back its inventory, it went too far in the first quarter of fiscal 2013.

Abercrombie's inventory levels dipped too low in Q1 fiscal 2013, leading to a sharp decline in its comparable store sales. According to Abercrombie's management, about 10% of the 17% decline in comparable store sales was due to inventory issues. Along with the inventory shortage, weak industry trends also impacted the retailer's results. The overall apparel industry in the U.S. went through a rough phase in the first quarter due to prolonged winter season, payroll tax increase and delayed tax refunds.

Cautious Consumer Spending Din't Let The Retailer Recover In The Second Quarter

Following the first quarter, the apparel industry in the U.S. remained weak in the second quarter as well. Due to the payroll tax hike and prevailing unemployment, U.S. buyers scaled back their spending on non-discretionary products. Moreover, they shifted from relatively expensive brands such as Abercrombie to other low-cost and fast-fashion brands such as Zara, Forever 21 and H&M . The unemployment rate in the U.S. rose in as much as 28 states in July, as U.S. employers slowed their hiring outside the farming sector. The worst affected was the teenage segment where the unemployment rate was at 23.7%, which is one of the highest for large economies.

As a result of the industry weakness, several apparel retailers ushered heavy markdowns in July to bring back their customers and attain a clean inventory position for the third quarter. Abercrombie followed the same trend which led to a decline of 10% in its comparable store sales. Although the company managed to enter the third quarter with optimum inventory levels, it is expecting Q3 growth to be weaker than Q2.

Back-To-School Season Will Be Weak

Back-to-school season, which runs through most of the third quarter, is the second most important period for apparel retailers in the U.S. However, this year's back-to-school season is likely to remain weak due to the prevailing economic weakness and change in shopping trends. According to the National Retail Federation, average spending per family on apparel, shoes, supplies and electronics will decline by almost 8% during this season as compared to 2012.

The survey found that eight out of every ten shoppers were planning to lower their spending this season. About 76% of the college shoppers said that they will spend less and 37% said that they will shop only during the discount sales. Interestingly, around 45% shoppers were planning to use their previous year's products rather than shopping again. Moreover, there has been a change in the shopping trend where shoppers buy products at the start of the season to take advantage of initial markdowns and do not return until end of the season sales. This way, they only buy products at discounted prices which impacts the apparel retailers' sales.

The month of August witnessed heavy discounts being offered industry wide, which weighed on the comparable store sales growth of several retailers. Also, a number of U.S. shoppers have started diverting their spending to cars and houses to take advantage of low interest rates. Subsequently, they are holding back on other products such as apparel and electronics. Recently, the Commerce Department stated that retail sales in August excluding the automotive sector increased by just 0.1%. Therefore, we believe that Abercrombie will continue to struggle in the third quarter.

Holiday Season Will Be Weaker Than Last Year

If ShopperTrak's early prediction of a weak holiday season is to be considered, there might not be any respite for Abercrombie in the the fourth quarter as well. According to its forecast, the holiday season this year will see its weakest gains since 2009, on account of cautious consumer spending, a shorter season and a change in shopping trends. Retail sales in November and December are expected to rise by just 2.4% while they improved by 3% last year and 4% in 2011 and 2010. Moreover, the store traffic is likely to fall by almost 1.4%. This is not a pleasing picture given that last year's holiday season remained weak despite a 2.5% increase in store traffic.

ShopperTrak founder, Bill Martin, stated that U.S. buyers are concerned about a number of macroeconomic and political issues such as the possible budget fight in Washington and uncertainty over Syria. Moreover, higher healthcare costs and gasoline prices as well as the payroll tax increase are weighing on consumer spending. According to a poll conducted by Reuters, about 27% of the consumers are planning to lower their spending on apparel this holiday season. Moreover, the holiday season this year is shorter than the last year, since there are only 25 days between Black Friday and Christmas as opposed to 31 days in 2012. This provides a smaller window to gain from holiday spending.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AEO , ANF , ARO , URBN

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