- Abercrombie & Fitch’s direct-to-consumer revenues have grown at an average annual rate of 27% for the past few years and amounted to $700 million in 2012.
- Going forward, we expect these revenues to grow to $1.6-$1.7 billion by the end of our forecast period.
- Growth in the U.S. online apparel market will be the major driver while international markets will make a relatively smaller contribution.
- We expect the U.S. online apparel market to grow to about $8.5 billion by the end of our forecast period with Abercrombie & Fitch commanding a share of close to 17%.
- The retailer is trying to boost its online sales by improving inventory management and pushing into mobile commerce.
Abercrombie & Fitch’s (NYSE:ANF) direct-to-consumer business mainly includes its e-commerce channel. Revenues from this business declined from $310 million in 2008 to $290 million in 2009 due to unfavorable economic conditions that impacted the retailer’s premium priced namesake brand. However, revenues rose sharply to $410 million in 2010 as the retailer’s share in the U.S. online apparel market increased from 10% to 12%. 
Subsequently, Abercrombie’s entry into mobile commerce and the launch of e-commerce in Europe drove revenues higher to $700 million in 2012. Overall, direct-to-consumer revenues grew at an average annual rate of 27% during 2007-2012.  In the long term, we expect these revenues to reach around $1.6 to $1.7 billion driven by the growing online apparel market and Abercrombie’s expected market share gain.
Growing Online Apparel Market
Online shopping is gaining popularity in the U.S. due to increasing Internet penetration and the proliferation of smartphones and tablets. Forrester forecasts that the U.S. online retail sales will amount to $262 billion in 2013 (an increase of 13% over 2012) and reach $370 billion by 2017.  This amounts to a compounded annual growth rate (OTCPK:CAGR) of 9% for the period 2014-2017. Assuming a slight slowdown in subsequent years, we expect online retail sales in the U.S. to grow to about $420 billion by 2019, which is the end of our forecast period. This figure was at $176.2 billion in 2010, which gives a CAGR of about 10% for the period 2011-2019. 
The next step is to estimate growth in the online apparel market. Historically, online apparel sales have grown faster than the overall online retail sales. From 2004 to 2009, while online retail sales increased at an average annual rate of 16%, online apparel sales increased by 19% annually (data not available for 2010-2012).  Assuming that a similar trend continues in the future, we estimate a CAGR of 11.5% for the online apparel retail market which is slightly higher than 10% CAGR for the overall online retail market. Given that the online apparel sales in the U.S. stood at $2.9 billion in 2009, a 11.5% CAGR implies that this market will grow to about $8.5 billion by the end of our forecast period.
How much of this $8.5 billion market will be held by Abercrombie?
For this, let’s look at the historical trend in its market share. During 2006-2010, Abercrombie’s share in the U.S. online apparel market increased from 10.7% to 12.1%.   The figure jumped to 15% in 2011 as the retailer integrated its mobile-commerce channel.  Going forward, we expect the market share to increase slowly due to a mixed impact of Abercrombie’s initiatives and increasing competition in the U.S. Assuming that this figure reaches 17% by the end of our forecast period, the retailer’s direct-to-consumer revenues from the U.S. will be close to $1.4 billion. Another $200-300 million can come from international markets where growth will be moderated by an unfavorable economic environment in Europe. As a result, we expect total revenues to reach around $1.6 to $1.7 billion.
Abercrombie’s Efforts To Drive Its Online Sales
Over the last year, Abercrombie has faced difficulties with inventory surplus due to its buying strategy. The strategy was focused on anticipating the success of upcoming fashion trends followed by appropriate bulk purchases. This resulted in excessive promotional discounts which led to a decline in the average price per unit when anticipated seasonal sales didn’t materialize.
To address this issue, Abercrombie is looking to maintain tighter inventory. The retailer is increasing its inventory at a much slower pace than the sales growth. For instance, in Q4 fiscal 2012, the retailer sustained low inventory carryover for its fall collection, which resulted in 35% lower inventory compared to Q4 fiscal 2011.  Moreover, it started sourcing goods from within the U.S. and low-cost destinations of Central America, thus reducing the lead time.  We believe that tight inventory control will help Abercrombie achieve steadier sales growth.
In 2010, Abercrombie entered m-commerce using Digby’s mobile commerce platform and made its websites available on all Internet-enabled mobile devices, allowing the users to browse and purchase with convenience.  During the same year, the retailer also launched an iPad app.  This opened a new channel for Abercrombie to directly complement its direct-to-consumer business. M-commerce sales accounted for 3% of the U.S. e-commerce sales in 2012, and this figure is expected to reach 9% by 2017.  Additionally, Abercrombie is also working with IBM to establish a fast and efficient online platform. 
While these factors should help Abercrombie’s direct-to-consumer revenue growth in the future, increasing competition from retailers such as Urban Outfitters (NASDAQ:URBN), American Eagle Outfitters (NYSE:AEO) and Gap (NYSE:GPS) will have a mitigating effect.
How Significant Is This Growth?
We currently forecast Abercrombie’s direct-to-consumer revenues to reach somewhere around $1.6 to $1.7 billion by the end of our forecast period. However, consider a scenario where growth in international markets picks up, Abercrombie outperforms its peers with the right product mix and marketing and online retail sales in the U.S. grow faster than what we forecast. If this drives direct-to-consumer revenues to $1.9 billion by the end of our forecast period, there can be 10% upside to our price estimate. On the flip side, if competition becomes exceedingly fierce online, economic growth remains sluggish and Abercrombie continues to battle inventory issues that limit revenues to $1.4 billion, there can be 10% downside.
Our price estimate for Abercrombie & Fitch Stands at $51, implying a discount of about 10% to the market price.
- Calculated using the data available with United States Census Bureau
- Abercrombie & Fitch’s SEC filings
- U.S. Online Retail Sales To Reach $370B by 2017, Forbes, Mar 14 2013
- U.S. Online Retail Forecast, 2010 to 2015, Forrester, Feb 28 2011
- Abercrombie & Fitch Enters Mobile Commerce, Mobile Commerce Daily, Jan 21 2010
- Abercrombie & Fitch Q4 fiscal 2012 earnings transcript, Feb 22 2013
- Abercrombie & Fitch Q2 fiscal 2012 earnings transcript, Aug 15 2012
- Abercrombie & Fitch And Hollister Co. Go Mobile With Digby, Digby, Jan 26 2010
- M-Commerce Sales Via Smartphones Hit $8 Billion In 2012, Internet Retailer, Jan 16 2013
- Abercrombie & Fitch Expands Online Business With IBM Smarter Commerce, IBM, Jan 17 2012
Disclosure: No positions