Abercrombie & Fitch Sales, Profitability Lift Outlook

| About: Abercrombie & (ANF)

Abercrombie & Fitch (NYSE:ANF) recently reported earnings that showed encouraging improvements in its sales metrics and profit margins which we feel will continue.

A&F is a leading apparel company that targets teens and young adults primarily in the US. It competes with retailers like Aeropostale (NYSE:ARO), Gap (NYSE:GPS), J.Crew Group (NYSE:JCG) and Urban Outfitters (NASDAQ:URBN), and owns apparel brands such as A&F, Hollister and Gilly Hicks.

We estimate that A&F Stores account for 37% of A&F’s stock compared to 28% for Hollister stores, and we currently have a price estimate of $53.34 for ANF, which is about 12% above the current market price.

1. A&F Stores Revenue per Square Foot

Revenue per Square Foot (RPSF) for A&F Stores increased at an annualized rate of 5% during 2005-2007. From 2007 to 2009, RPSF at A&F Stores dropped from $476 to around $370, nearly 12% a year on an annualized basis. [1] This was largely due to falling demand in the apparel industry as a result of the economic downturn in this period.

So far this year, the company has reported RPSF for A&F Stores of $85 and $96 for Q1 and Q2,((ibid)) suggesting an increasing trend. We forecast this reaching $380 for the full year and growing to $470 by 2016 as consumer spending returns in the US, supplemented by A&F’s international expansion.

There is a growing demand for luxury apparel and popular western brands in the Asian market and 15-25 year olds make up an increasing percentage of the population, which the company primarily targets. The company’s international A&F Stores have reported strong sales, and the company believes that there is tremendous upside in its international business.

However, if RPSF remained flat over the forecast period, this translates to 5% downside in our A&F price estimate

2. A&F Stores Profit Margin

A&F Stores’ EBITDA margins (a measure of profitability) have historically remained close to 26% before declining sharply in 2008-2009 as the US economy stalled and consumer spending declined. As a result of falling sales and increasing operating expenses A&F stores’ EBITDA margin declined to 19% in 2009.

In 2010, A&F has reported higher margins driven by improving sales and a decrease in store and distribution expenses and SG&A. This was partially offset by lower average unit retail sales that resulted in lower gross margins.

We believe A&F stores EBITDA margin will continue to rise from around 17% in 2010 to 25% by 2016, as the company is focused on reducing the average unit cost for all of its divisions and growth in merchandise margins, which were significantly impacted during the economic downturn.

You can drag the forecast trend-line above to express your own view, and see the sensitivity of Abercrombie & Fitch Co.’s stock to A&F Stores EBITDA margin.


  1. Taken from Company’s Q1 and Q2 10-Q reports

Disclosure: No positions