It’s been a rough road for Abercrombie & Fitch (ANF) over the last few years but the firm has recovered very well. In the process, it finally cut down pricing in 2010 to become more competitive and looks to be back in the swing of things. In the most recent quarter the firm was actually able to increase its gross margin up to 65%, which was a stand out number for the firm. While the global economy may still be shaky the firm seems to have what it takes to have everything in place to start putting up big numbers again.
The firm has started to differentiate itself from competitors by really starting to develop its e-commerce and international operations. Point in case, e-commerce sales for the firm increased by 32% while international sales expanded by 64% during the last quarter. While many question or doubt A&F’s ability to stand out and sufficiently break away from the apparel pack coming out of this last global recession, we stand in A&F’s camp. We feel confident that the firm has everything in place to start dominating competition again and may even do better this time around so we rate it a BUY.
1. International Expansion
It’s clear to see that for A&F, growth for this firm lays abroad. The firm has saturated the US market and growth is likely to remain in the single digits cumulative of all store brands over the long term. Moving forward, we see the real growth story being abroad. Competitors are likely to be left in the dust by the time they realize how vital this move is.
The firm first made its move abroad in 2006 and ever since then it’s been seen as a wise move. As previously mentioned, in the most recent quarter the firm’s international sales increased a full 64%. In particular, we see the Asian markets as being ripe with opportunity given that various cultures over there are still very status oriented. Europe is likely to offer strong growth numbers as well, but we feel that competition will likely be higher there and therefore are more reluctant to see Europe as an easy place for expansionary growth.
China in our opinion stands out as the largest opportunity for the firm given the population, growing middle class, socio-economic culture, and level of GDP growth. News reports constantly come in talking about the opulence and extreme level of wealth flowing in China. Thus, we see this as perfect place for Abercrombie to gain a strong foot hold and exude its upscale image before competitors even try to make a serious move for this market. Even more high-end brands such as Prada are moving quickly to gain a presence in China by going public in Hong Kong.
2. Spectacular Business Strategy
While many attribute A&F’s success to its image conscious branding and advertising campaigns featuring scantily clad models, we think it’s more than just that. In our view A&F operates and executes a business model that no competitor has yet been able to match in a few different ways.
In the last quarter A&F did 19% more in sales than its closest competitor American Eagle Outfitters (AEO). While that may not sound too spectacular at face value, consider this next. Today, A&F operates 250 domestic and 1000 foreign stores (all brands included) while AEO operates roughly 1000 stores in the US alone. That’s literally 4 AEO stores for every A&F store or 1000 stores globally (all brands included) against just AEO’s US operations. In our view, based off the sales and store numbers, A&F without question operates a better business model than even its closest competitor.
When A&F wants to duke it out with another competitor, it takes the fight to the competitors’ home turf. A&F going head to head is way too 20th century. Instead, it figured that a better idea would be to build a completely separate chain to compete with smaller competitors and actually steal some market share away. In our view this was the whole purpose of Hollister. There is little question that AEO at a point was giving A&F a real run for its money, but when Hollister came out it changed the game. Now it wasn’t AEO vs. A&F. It was AEO vs. Hollister. Hollister’s prices are just as competitive as AEO's and it is specifically built around the more cost conscious shopper who still wants to where high-end casual apparel. In our view, this was an ingenious move and much better way to deal with a competitor than going to head to head and having to cut costs with its flagship brand.
Abercrombie & Fitch is a company that doesn’t hold back. When competition heats up it doesn't recruit allies, it just generates allies internally. This firm has fewer stores in absolute terms with more brands than its closest competitor and it still smokes the competition worldwide. This firm out classes its competitors on almost every space except price, but that’s fine because this firm is looking to bring in top dollar, so that is why we rank ANF a BUY.