High Inventory And Traffic Decline Suggest A Weak Holiday Season For Abercrombie & Fitch

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Teen apparel retailer Abercrombie & Fitch ( ANF ) 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 environment.

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 & Fitch

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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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

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