Is Abercrombie & Fitch Awaiting A Turnaround?

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Dec 16, 2014

According to ShopperTrak, overall store traffic in the U.S. has fallen by 5% in the last two years. In fact, things got worse when traffic plunged 17% in September this year, over last year. This is alarming for the retailers who mainly bank on the customers' visits at stores for most of their sales. Furthermore, teenagers' tastes and preferences have changed. They now prefer to spend more on technology and food than to spend on clothing. This has resulted in lower sales of apparel retailers.

Specialty retailer Abercrombie & Fitch (ANF, Financial) is one such company that is having a tough time in attracting teenagers to its stores. Its logo products no longer resonate with younger customers. Thus, the company felt the pinch that was reflected in its third-quarter numbers. The results were below the Street's expectations, sending its shares lower.

Snapshot of the quarter

Revenue for the quarter dropped 12%, to $911 million, over last year. This was below the analysts' estimate of $918.3 million. Factors such as weak demand, low traffic and deep discounts affected the top line. Also, unfavorable weather conditions and a highly promotional environment hindered sales. Therefore, same store sales declined 10.1% during the quarter.

Another key area of concern was the International segment. International sales dropped 15% over last year. This was mainly because of weak demand in Europe. Sluggish economic environment in Europe resulted in lower foot traffic.

Further, poor demand for logo products as customers get attracted to new fashion clothing, resulted in lower sales. It faces stiff competition from brands such as Zara and Forever 21, which provide fashion clothing to the customers, as per changing tastes and trends. Hence, it plans to shun its logo products and bring a change in the product assortments.

Going by the brands, revenue from Abercrombie's flagship brand dropped 6%, that of Abercrombie Kids declined 10%, and that of Hollister plunged 12%. This was also because people have shifted to online shopping and even steep discounts are unable to match up to the convenience provided online.

Gross margin declined 80 basis points to 62.2%, over the prior year. This decline was mainly because of discounts provided to the customers in order to attract customers and increase store traffic. Also, earnings dropped to $0.42 per share from $0.52 per share in the previous year.

Plans to look forward to

Abercrombie plans to expand its footprint in Mexico. It recently entered into a deal with Grupo AXO for enhancing its presence in the region. Also, it plans to invest in the e-commerce business since online shopping has become very popular.

Efforts such as ramped up promotions, improvement in the product assortment and closure of underperforming stores should help the company boost its sales. Also, sales picked up last month due to Black Friday weekend. These factors make Abercrombie's prospects look bright.

My takeaway

It is clear that the retailer is undergoing hardships. However, there are indication of growth too. The company's strategic efforts and the upcoming holiday season make things look better. Its focus on expansion in new regions and the growth of the ecommerce segment should help register growth. But Abercrombie lowered its earnings outlook significantly, which disheartened the investors. Hence, investors should be on the sidelines and wait for the signs of a possible turnaround.