Last year, when most apparel retailers in the U.S. were
Abercrombie & Fitch
) 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 &
Inventory Shortage Weighed On The First Quarter
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
. 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
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'
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
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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