Teen apparel retailer
Abercrombie & Fitch
) had a torrid time last year, dogged by controversy, less popular
fashion merchandise and a weak retailing environment. The
retailer's comparable store sales declined by 17%, 10% and 14%
during the first three quarters of fiscal 2013, respectively.
We do not expect it to have performed much better in the
recently concluded holiday season. Abercrombie's holiday sales
results were likely poor for the quarter, given its weak
inventory position at the beginning of the season and the sharp
decline it has experienced in U.S. store traffic. Both its namesake
chain and Hollister have under-performed in recent quarters.
For some time now, the retailer has had trouble with inventory
management which has often left it with surplus inventory. To clear
this, Abercrombie usually ushers heavy markdowns, which weigh on
its comparable store sales growth. During the holiday season,
Abercrombie was seen offering 50% discounts on certain occasions.
To add to the retailer's miseries, foot traffic declined
significantly during December owing to the weak economic
Our price estimate for Abercrombie & Fitch
stands at $40
, implying a premium of about 25% to the market price.
See our complete analysis for Abercrombie &
High Inventory Triggers Heavy Discounts
Abercrombie went through most of fiscal 2012 trying to clear
surplus inventory that dragged its store sales down. In the
process, its inventory levels dipped too low in Q1 fiscal 2013,
leaving it with less to sell. It appears that the company still
hasn't figured out a way to manage its inventory properly as its
inventory problems persisted in the third quarter. Ideally, a
retailer tries to keep its inventory growth rate in tandem with its
sales growth rate. However, during the third quarter of fiscal
2013, while Abercrombie's overall sales declined by 12%, its
inventory at cost increased by a staggering 22%. This clearly
indicates that the company failed to stock merchandise that would
sell and were left with too much of past season's inventory at the
beginning of the holiday season. This did not help Abercrombie in
attracting customers during November and December, and it had to
rely on heavy discounts to drive store traffic.
Sharp Decline In U.S. Store Traffic
Due to weak consumer sentiment on account of political issues,
increased taxes, higher healthcare costs and gasoline prices,
2013′s holiday retail sales were expected to see their weakest
gains since 2009. ShopperTrak had predicted that retail sales for
November and December would increase by just 2.3% with 1.4% decline
in store traffic. While sales trends have been somewhat inline with
the forecast, traffic trends have been worse.
During Thanksgiving and Black Friday (two of the most important
holidays for retailers), retail sales grew by just 2.3% indicating
that the rest of the month might have been worse for apparel
retailers. While U.S. buyers spent freely on electronics, furniture
and building materials, they were hesitant to spend on clothing.
According to a Reuters poll conducted before the holiday season,
about 27% of the consumers were planning to lower their spending on
apparel this holiday season.
December was marked by a sharp traffic decline across the U.S.
retail market, as shoppers continued to spend cautiously.
ShopperTrak reported that U.S. retail sales fell by 0.8% year over
year for the week ending on December 15, due to 19.9% decline in
store traffic. The founder of ShopperTrak stated that extreme
weather conditions prevented buyers from completing their shopping.
Furthermore, store visits plummeted by 21% in the week through to
December 22. ShopperTrak even predicted that Christmas 2013 will
see 10% fewer customers as compared to 2012. Given these challenges
to retailers in general, we believe that Abercrombie had an even
tougher time in attracting customers, given that it hasn't been a
popular shopping destination for teenagers in recent quarters.
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