Abercrombie’s Hollister: Revenues Should Recover with U.S. Economy

| About: Abercrombie & (ANF)

Abercrombie & Fitch (NYSE: ANF) is a specialty retailer whose Hollister stores division sells a broad selection of premium apparel, accessories and personal care products aimed at consumers aged 14-18. Abercrombie competes primarily against brands from Aeropostale (NYSE:ARO), Gap (NYSE:GPS), American Eagle (NYSE:AEO) and Urban Outfitters (NYSE:URBN). The Hollister brand, which is marketed with reference to the laid-back lifestyle associated with Southern California, contributes nearly 29% to the $53 Trefis price estimate for Abercrombie & Fitch’s stock.

Hollister lost significant market share during the recession. But given Abercrombie’s aggressive marketing efforts and the improving U.S. economy, Hollister should do better in coming years. Below we explain why.

Recession blues

Between 2007 and 2009, Hollister’s market share among leading teen specialty apparel retailers fell by nearly 5%. During this period, revenue per square foot from Hollister stores decreased at an annual rate of 20%, while that of Aeropostale stores grew by 7% a year.

Two key factors driving Hollister’s share decline during the recession were its high prices and lack of promotional discounting. Hollister’s price points are about 50% higher than Aeropostale’s. And while Hollister refrained from discounting and promotions in order to maintain its premium brand image, Aeropostale followed an aggressive promotional merchandising strategy, with two-for-one deals and other sale offers across its stores.

Creative marketing

Hollister’s revenue per square foot increased from $350 in 2002 to $550 in 2006, an annual growth rate of nearly 12%. This success was largely due to A&F’s creating marketing campaign. Abercrombie has concocted an elaborate pseudo-history around the brand, based on the adventures of the fictional John M. Hollister. (The character is an adventurous young American who travels through Asia and the South Pacific in the early 1920s before setting up Hollister Co. in California.)

The company also uses the “walking self-advertisement” technique. Customers promote the brand by wearing the clothes, most which are emblazoned with the Hollister name, logo, initials, and fictional date of establishment. These marketing strategies have helped Hollister connect with its target customers—youth from upper income families, a demographic where peer activity plays a key role in setting fashion trends.

As the recession wears off, we expect a revival in demand for Hollister clothing. The brand has a strong image and many customers who shifted to lower priced brands like American Eagle and Aeropostale can be expected to migrate back to Hollister.

We believe that Hollister’s revenue per square foot, which languished around $320 in 2009, can surpass $400 by 2016, enabling it to regain some market share. You can modify our revenue per square foot forecast for Hollister stores to see its impact on our $53 price estimate for Abercrombie & Fitch’s stock.

Disclosure: No positions