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WIKI ANALYSIS
Abercrombie & Fitch (NYSE: ANF) sells its own brand of fashion-conscious clothing and accessories to a customer base that is primarily under 30 years old. Abercrombie sells the vast majority of its wares in American malls through its four different store brands (Abercrombie & Fitch, abercrombie, Hollister, and RUEHL)[1], each of which caters to different age groups.[2] The company generated over $3.5 billion in sales in 2008, down from $3.7 billion in 2007.[3]
As a "near luxury" retailer, Abercrombie sells its clothing and accessories at a price premium. In addition, unlike almost every one of its competitors, the company has not engaged in "sales" (i.e., price discounting), which helps retain its image and keep its profit margins high. However, as the American economy entered a recession in 2008 which has continued into 2009 the company has found itself reassessing its pricing strategy and considering lowering average unit price in its stores, specifically Hollister and its kids' lines. The company's financial woes have been exacerbated by CEO Michael Jeffries' retention pay. In 2008 the company reported income tax expenses of $0.11 per share as a result of retention awards to Jeffries. Abercrombie & Fitch plans to open its first Asian flagship in Japan in December 2009, meaning the company can take advantage of the Asian market, which has been a focus for the retail industry. Finally, as a fashion retailer ANF is susceptible to changing fashion trends. It missed out on two key trends during the first quarter of fiscal 2009--skirts and intricately patterned goods--which has contributed to a decrease in sales.
Business Overview
ANF sells premium-priced apparel and accessories and through its five independently-branded stores: Abercrombie & Fitch; abercrombie; Hollister Co.; RUEHL No.925; and its newest concept Gilly Hicks. As of March 2009 the company operated 1,127 store locations across its five brands in the U.S., Canada and the U.K. ANF manufactures and distributes its own private label clothing under each of its four in-house brands. Each of ANF's brands also sells products to customers directly via catalogs and e-commerce operations. ANF's direct-to-customer operations generated $271 million of sales in 2008, up 4.7% from 2007.[4]
Business and Financial Metrics
The company generated $3.540 billion in sales in 2008, down from $3.7 billion in 2007[3], on which it earned $2.3 billion of gross profit and $439 million of operating profit.[3] ANF's premium-quality business model translates into high operating costs and the company spent over $1.5 billion on store and distribution expenses which includes store remodeling and costs associated with its distribution centers.
Abercrombie has hit a rough patch in 2008 and 2009 as it struggles to grow its same-store sales which declined 13%[4] in 2008. Same-store sales across all the company's brands decreased, though RUEHL and abercrombie decreased the most (same-store sales decreased by 23 and 19% respectively).[4] Net sales for the second quarter of fiscal 2009 were $648.5 million, a 23% decrease from the second quarter of fiscal 2008.[5] For the quarter, the company reported a net loss of $26.7 million whereas it had a net income of $77.8 million in the second quarter of fiscal 2008. Online sales decreased by 13% and comp store sales by 29%.Citigroup downgraded its rating of ANF from "hold" to "sell," denoting decreased confidence in the retailer, especially in midst of the continued recession.[5]
In addition to decreasing sales (same store sales in March 2009 were 34% lower than March 2008[6]), retention of the company's CEO Michael Jeffries has proved costly for ANF. The company has recorded income tax expenses averaging $0.11 per share due purely to retention awards to Jeffries.[7] Although Jeffries agreed to cut his "stay bonus" in half in 2005 due to a shareholder lawsuit, his retention payments are another hit to the company's revenues, especially when his no-discounts policy has resulted in the company's core demographic trading down to lower-priced stores.[8]
| Brand | Primary Age Segment | Net Sales ($ millions; FY08) | Net Sales as % of Total Revenue (FY08) | Avg. Store Size (Square Feet; FY08) | Avg. Sales per Store (thousands $; FY08) | Avg. Sales per Square Foot (FY08) | Price of Avg. Unit Sold (FY08) | Same Store Sales Growth (Loss) (FY08) | No. of Stores (Q1 FY09) |
|---|---|---|---|---|---|---|---|---|---|
| Abercrombie & Fitch | 18 to 22 Year Olds | $1,531 | 43.3% | 8,808 | $3,878 | $438 | $86.95 | (8%) | |
| abercrombie | 7 to 14 Year Olds | $421 | 11.9% | 4,452 | $1,823 | $397 | $67.10 | (19%) | |
| Hollister | 14 to 18 Year Olds | $1,514 | 42.8% | 6,626 | $2,962 | $442 | $54.70 | (17%) | |
| RUEHL | 22 to 30 Year Olds | $56 | 1.6% | 9,286 | $2,039 | $217 | $85.11 | (23%) | |
| Gilly Hicks | Young Women | $17 | N/A | N/A | N/A | N/A | N/A | N/A | 5 |
Trends and Forces
Expansion to new markets in Asia
New wealth has been developing in Asia, specifically China and India. The retail industry has sought to get in on the ground floor of the rapid development of the area by establishing a presence in Asia. Right now, ANF's international presence is restricted to the United Kingdom and Canada with plans to open a flagship in Japan in December.[11] Establishing a brand in Asia, especially when spending power in the area is increasing, can have repercussions in the future, especially if its main competitors enter the market before ANF decides to do so. Those repercussions would take the form of lower sales in comparison to its competitors. However, since the Asian market has displayed a big appetite for luxury goods, ANF's image as a "luxury" retailer can work to its advantage by seeming more appealing to Asian consumers.
Seasonal Strength in the Second Half of the Year (Back-to-School and Holidays)
Because the overwhelming majority of the customers of ANF's brands range from 7 to 22 years old, many are students at some level of education. As a result, ANF traditionally experiences a significant boost in sales during the end of summer as students shop in preparation for school. The back-to-school shopping season also boosts sales for ANF's competitors such as American Eagle Outfitters (AEO), Aeropostale (ARO) and Pacific Sunwear of California (PSUN). In addition, the holiday season is a big time for retail industries as customers begin to buy Christmas presents. Many of ANF's aforementioned competitors have incorporated sales into their business models at those specific times, meaning they want to take advantage of times when shopping is at its highest and make sure their customers are inclined to spend money at their stores. Until recently, however, ANF did not incorporate sales into its pricing strategy out of the belief that doing so would tarnish the "luxury" label the brand has cultivated.[11] When a recession hit the American economy in the end of 2008, however, ANF began to place seasonal goods on clearance to get rid of excess inventory. In addition the company is currently seeking to introduce new, lower-priced items into its Hollister and kids lines. These decisions came on the heels of a 25% comparable store sales decrease during the 2008 holiday season.[12] ANF's decision to reassess its pricing strategy came too late to temper the decrease in sales during holiday 2008, however looking forward it can help the company to retain its customers who are feeling the pinch of the recession.
Missing out on important trends leads to lower sales
Since ANF is primarily a fashion company, it's success relies heavily on its ability to anticipate changing fashion trends and adjust its product offering in order to accommodate those trends. In the first quarter of fiscal 2010 the company missed two key trends, namely dresses and highly-decorated pieces. ANF, anticipating skirts would sell better than dresses, focused on skirts instead.[11] This misfire is one of the factors contributing to the first quarter's lower sales: $612 million for the 13 weeks leading to May 2, 2009 compared to $800 million for the 13 weeks leading to May 3, 2008.[11] Given the tough environment for retail companies in 2009, it is more important now than ever for brands such as ANF to correctly anticipate coming trends, as it will be even harder to convince consumers to spend money than it would have been in previous years when people had more disposable income.
Competition
ANF competes with a bevy of apparel and accessory retailers competing for the 14-30 year old demographic. ANF has consistently been at the top of its sector in terms of profitability and sales. ANF's 66.6% gross margin in 2006 was by far the highest out of all of its competitors, largely because ANF's prices are considerably higher than those of its competitors and because the company does not discount its merchandise to the degree of its competitors. As a point of reference, the approximate average price for a pair of men's jeans at Abercrombie & Fitch is $80 compared with $45 at American Eagle, $25 at Aeropostale and $50 at Gap.
Abercrombie & Fitch's competitors include:
- American Eagle Outfitters (AEO): American Eagle competes directly for the same customers (young men and women between the ages of 15 and 25)[13] with Abercrombie & Fitch and Hollister stores; also, American Eagles new Martin + OSA stores compete with ANF's RUEHL. AEO is smaller than ANF in terms of total sales and profits, but AEO has exhibited stronger growth recently than ANF.[14]
- Aeropostale (ARO): Aeropostale is a smaller company than ANF, operating only one brand of stores that targets 14 to 17 year olds. Aeropostale's business model also relies heavily on sales and promotions as opposed to ANF's high-quality, premium-price strategy.[15] However, Aeropostale recently launched a new concept called Jimmy'Z, which is a chain of stores targeting 18-24 year olds with surf inspired apparel which will compete directly with Hollister stores if the concept grows.
- Pacific Sunwear of California (PSUN): Pacific Sunwear primarily serves several different customer segments through its three retail chains: PacSun, demo, and One Thousand Steps. PacSun stores are based mostly around trends in the alternative sports (surfing, snowboarding, skateboarding, etc.) lifestyle and offer third-party branded as well as private label apparel, footwear and accessories to teenagers and young adults.[16] Finally, demo stores target 16 to 24 year olds with fashion and accessories influenced by hip-hop lifestyle and One Thousand Steps offer a wide range of casual footwear to the 18 to 24 year old customer segment.[17] Because Pacific Sunwear's operations depend largely upon third-party brands, footwear and different lifestyle-focused customer segments it is less comparable to ANF than American Eagle Outfitters (AEO) or Aeropostale (ARO).
- Urban Outfitters (URBN): Urban Outfitters is a relatively young retailer that operates three different branded store chains, Urban Outfitters (18 to 30 year olds), Anthropologie (30 to 45 year old women), and Free People (16 to 35 year old women).[18] Urban Outfitters is not as directly comparable to ANF due to its slight differentiation in targeted customer segments.
- Gap (GPS): Gap is a much larger company than ANF in terms of sales, stores and customer segments targeted. Through variations on Gap (Gap Kids, babyGap, Gap Maternity) the retailer serves a wide range of customers; also, Banana Republic and Old Navy stores serve different socio-economic segments.[19] Because of the wider range of customers, Gap doesn't match up with ANF as closely as some other competitors, however there is considerable overlap.
| Company | Net Sales (mm) | Gross Margin | Operating Margin | Sales Growth (Decline) from 2007 | Same Store Sales Growth (Decline) | Total Stores | Sales per Store (thousands) |
|---|---|---|---|---|---|---|---|
| Abercrombie & Fitch | $3,540 | 66.7% | 12.4% | (5.59%) | (13.0%) | 1,093 | $3,018 |
| American Eagle Outfitters (AEO) | $2,989 | 39.3% | 10.1% | (2.18%) | (10%) | 1,012 | $2,953 |
| Aeropostale | $1,886 | 34.7% | 13.2% | 18.5% | 8% | 914 | $2,062 |
| Pacific Sunwear of California | $1,255 | 25.5% | (4.86%) | (3.91)% | (5.2)% | 932 | $1,347 |
| Urban Outfitters (URBN) | $1,835 | 38.9% | 16.3% | 21.7% | 7.8% | 294 | $6,240* |
| Gap (GPS) | $14,526 | 37.5% | 10.7% | (7.84%) | (12.0%) | 3,149 | $4,612 |
References
- ↑ Abercrombie & Fitch (ANF) Annual Report 2006, "Overview", p.15
- ↑ Abercrombie & Fitch Investor Website, "Our Brands"
- ↑ 3.0 3.1 3.2 ANF 2009 Annual Report pg. 32
- ↑ 4.0 4.1 4.2 ANF 2009 Annual Report pg. 31
- ↑ 5.0 5.1 Abercrombie & Fitch Co. Reports Operating Results (10-Q)
- ↑ "Abercrombie & Fitch Reports March Sales Results"
- ↑ "Retaining Jeffries as CEO Proves Costly to Abercrombie & Fitch"
- ↑ "Retaining Jeffries as CEO Proves Costly to Abercrombie & Fitch"
- ↑ 9.0 9.1 ANF 2009 Annual Report pg. 23
- ↑ ANF 2009 Annual Report pg. 26
- ↑ 11.0 11.1 11.2 11.3 "Abercrombie & Fitch Co. F1Q09 (Qtr End 05/02/09) Earnings Call Transcript".
- ↑ "Abercrombie & Fitch Co. F4Q08 (Qtr End 01/31/09) Earnings Call Transcript".
- ↑ American Eagle Outfitters (AEO) 10-K 2006, "Business", p. 1
- ↑ American Eagle Outfitters (AEO) Annual Report 2006
- ↑ Aeropostale (ARO) Annual Report 2006
- ↑ Pacific Sunwear of California (PSUN) Corporate Website
- ↑ Pacific Sunwear of California (PSUN) Corporate Website
- ↑ Urban Outfitters (URBN) Corporate Website
- ↑ Gap (GPS) Annual Report 2006
- ↑ AEO 2009 Annual Report pg. 17
- ↑ ARO 2009 Annual Report pg. 17
- ↑ PSUN 2009 Annual Report pg. 16
- ↑ URBN 2009 Annual Report pg. 22
- ↑ GPS 2009 Annual Report pg. 16
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