Shift to Kids Specialty Apparel Favors Abercrombie & Fitch

| About: Abercrombie & (ANF)

Abercrombie & Fitch (NYSE:ANF) is a specialty retailer that derives most of its revenues from its Abercrombie & Fitch and Hollister brands. In addition, the company operates two other brands, ‘abercrombie’, which offers casual luxury apparels for children in the age group 7-14 years, and ‘Gilly Hicks’, that offers intimate apparel for women, primarily in the age group 18-24 years.

We estimate that Gilly Hicks & abercrombie stores together constitute 14% of the $47 Trefis price estimate for Abercrombie & Fitch’s stock.

The ‘abercrombie’ brand has grown significantly since it was launched in 1997 and the store count now exceeds 200. We believe that the expanding market for children’s wear and the consumer shift to specialty apparel stores over department stores (Macy’s (NYSE:M)) and discount stores (Kohl’s (NYSE:KSS)), will benefit Abercrombie & Fitch.

‘abercrombie’ Store Sales Are Highly Correlated To Economic Growth and Consumer Spending

The children’s apparel market in the US grew at an annual rate of 5% from 2004 to 2008, reaching a value of $35 billion. During the same period, ‘abercrombie’ store sales grew at 17% annually.

The correction in the children’s apparel market in 2009, led by the economic downturn and the fall in consumer spending, affected ‘abercrombie’ sales by 17% year over year. However, going forward, the children’s wear market is expected to grow at 2-3% from 2009 to 2016.

‘abercrombie’ Targets Luxury Segment Of Children’s Apparel Market

The children’s wear market is becoming competitive with the entry of specialty store chains like American Eagle Outfitters (NYSE:AEO) and Aeropostale (NYSE:ARO) into this lucrative market.

The increasing demand for luxury wear in the children’s apparel market is a trickle-down effect from growth in the luxury market for women’s and men’s wear, before the recent economic downturn.

Children in age group 7-14 years are increasingly selecting their own apparel and A&F wants to directly market its ‘abercrombie’ brand to this demographic. The stores are designed to have a classic and cool effect to attract children.

The abercrombie merchandise primarily consists of casual luxury apparels, but at lower price points to the older Abercrombie & Fitch brand. The ‘abercrombie’ brand can leverage the luxury heritage of the company’s more established ‘Abercrombie & Fitch’ brand, which targets a slightly older demographic.

Revenue per Square Foot for ‘abercrombie’ Stores Set To Grow

As the US moves out of recession, consumer spending is expected to gradually pick up, resulting in a revival of growth in the luxury segment across all demographics.

We forecast the revenue per square foot for abercrombie stores will pick up and reach $378 by the end of the Trefis forecast period.

You can see our complete model for Abercrombie & Fitch’s stock here.