Anthony Davian's  Instablog

By Stiletto Stocks

After last week’s discussion of Inditex/Zara, I decided to take it back State-side to discuss one of my favorite retailers, Abercrombie & Fitch (ANF.) If you’ve followed Dasan’s work, you have likely read his opinion on ANF before (see it here.) Wanted to provide a little bit of lookback for you all to understand where the company has been, and where it is heading (to come more in Part II.)

Background:
ANF was founded in 1892 as a “sportswear and excursion goods” retailer by David Abercrombie, who was later joined by fanboy and co-partner Ezra Fitch. Ernest Hemingway killed a bunch of elephants, so on and so forth, and eventually Limited Brands bought the company for $47M in 1988. Now-CEO Mike Jeffries took over as president in 1992, and promptly re-branded the firm as a teen apparel retailer epitomizing “the essence of privilege and casual luxury” (ANF’s words… really.) ANF debuted on the NYSE in September 1996, and now every cool high schooler in America wears moose-checked polos and inexplicably pre-ripped jeans. The company has since launched several other concepts that complement A&F: abercrombie (for precocious 7-14 year olds) in 1998, beach-themed Hollister (14-18 year olds) in 2000, RUEHL No.925 for the post-grad in NYC who still longs for ANF clothes in 2004, and Gilly Hicks (an underwear store for billed as ANF’s “cheeky cousin from Sydney”) in 2008.

Business Model:
Unlike Zara, ANF does not manufacture its own clothes. The company maintains relationships with 210 vendors (primarily in Asia and Central/South America), and mitigates risk by spreading merchandise out over vendors (virtually no factory creates more than 5% of products at a given time.) Global operations, design work, and brand planning is conducted from the firm’s headquarters in New Albany, OH; 2 nearby distribution centers are responsible for stocking the firms’ 1,125 stores worldwide (an additional third-party facility in the UK handles distribution to ANF’s few UK stores, including the Savile Row flagship in London.) All the standard risks in working with third-party manufacturers apply; furthermore, ANF must design merchandise months in advance of the selling season (in contrast, as you will recall, to Zara.)

ANF engages in very little traditional advertising, particular in the U.S.; instead, the in-store experience serves as the primary vehicle for communicating the firm’s 5 brands to the public. A&F in many ways pioneered what it means to sell retail in the American mall—the company’s innovative scent marketing, thudding house music, and meticulously (and beautifully) presented merchandise floorset have forced other retailers to step up their game.

Take Gilly Hicks, for example: the store concept is described as this Gilly Hicks lass’ colonial-style manor house circa 1932, where she opens up an underwear store. The store is an intimate connection of rooms, darkly and beautifully lit with recessed pegs and drawers displaying a rainbow cornucopia of lingerie. The center room even has a chandelier, plush sitting chairs reminiscent of a tea room, and cartons of Gilly’s provocative sketches of beautiful men—probably the ones she romps around naked with on the beach as displayed on the website’s splash page (see above; Dasan, I’m looking at you.) Sex sells at A&F, but the aesthetics and meticulousness of the company’s branding is head and shoulders above “rivals” American Eagle Outfitters (AEO) and Aeropostale (ARO.)

International Expansion:
Direct-to-consumer business through the ANF website accounted for 8.9% total net sales in 2008—likely a testament to the strength of the company’s presence in malls. Probably the more crucial function of the company’s online retailing efforts is to prepare the way for the company’s international expansion. If you have been following ANF or other apparel retailers for the last 12 months, you undoubtedly know that ANF has been the stock the Street loves to hate, as the company defended its higher price points in the midst of the largest economic slowdown in decades. Dasan has spoken on this point previously, but part of the rationale behind this contrarian strategy is based on the importance ANF places on international markets. While competitors (particularly ARO) gleefully slashed prices to clear inventory and steal domestic market share, ANF has kept prices high to retain margins (which are nearly twice that of ARO) and kept an eye to international consumers, who have become accustomed to the higher price points at ANF stores (although the average item at A&F only cost $36.69 in 2008.) Encouraged by the success of the company’s London flagship, ANF is set to roll out international flagships in Milan in October 2009, Tokyo in December 2009, and Paris in 2011. It’s an old adage that’s it’s easy to drop prices, but hard to raise them; in the next 12-18 months, if consumer sentiment continues to stabilize globally, I predict that ANF will be much better positioned than competitors, who will now have to sell the consumer on “more normal” prices.

The promise of ANF is in its international expansion. The company’s model is currently tightly tied to the health of American shopping malls, which I believe are experiencing “consumer fatigue” due to the lack of store variety in most malls. Meanwhile, tourists for years have flocked to US-based ANF stores, buying merchandise that is not available in home countries and is highly prized for its “American luxury” appeal. A LT investment in ANF is a bet on the ultimate success of the company’s efforts to launch abroad, as well as a belief in the power of the brand’s cultural and consumer image.

Competitors:
I will continue to talk about how ANF compares against close competitors AEO and ARO in my next post, as well as discuss the companies’ stock performance. For now, here are some select comps data for you to crunch:




Disclosure: long ANF