Abercrombie & Fitch (NYSE:ANF) announced on 21st November that they had entered into an agreement with Grupo AXO in a bid to establish its presence in Mexico. The franchise agreement, which will encompass both Abercrombie & Fitch and Hollister, will allow both companies to open up retail stores across Mexico, with the first Hollister store expected to open up by late spring 2015 and the first Abercrombie store expected to be operational by late summer 2015. Abercrombie & Fitch already has its presence in North America, Europe, Asia, the Middle East and Australia, and their deal with Grupo AXO will mark its debut into the Latin American market. Although competitors such as Aeropostale (NYSE:ARO) and American Eagle Outfitters (NYSE:AEO) have been present in the Mexican market for quite some time, it is unlikely that their presence will affect Abercrombie & Fitch's performance in the market since the New Albany, Ohio based company already has a customer base in the country.
The changing economic environment in Mexico has produced a large and growing working population that is young and has managed to attract a variety of specialty retailers in the market. Stores like Victoria's Secret, Under Armour (NYSE:UA) and American Eagle Outfitters entered the region within the last two years, opening up chains across major cities such as Guadalajara and Cancun. The surge in specialty retailers can be attributed to the fact that Mexican consumers are now more conscious about international fashion trends and are looking for trendy styles that mostly come from Europe or the US.
The decision by Abercrombie & Fitch to expand into Mexico also comes as the Mexican economy has seen its middle class grow to new highs, leaving consumers with more disposable income. This, coupled with the fact that this middle class society has young individuals who are highly conscious of international fashion trends, gives you a prime market for brands such as Abercrombie & Fitch to tap into. The steady growth of this small market size is a positive sign for the apparel industry, but the last 8 quarters have shown that the Mexican economy has slowed down. Last year the economy grew by a dismal 1.3% and a revised forecast for this year, by the Mexican Central Bank, puts the GDP growth rate guidance between an optimistic 2.3% and 3.3%. Up till now the apparel market has grown consistently in the past few years despite the economic slowdown, but it is likely that the decrease in domestic demand will eventually have a negative impact on the industry. Even the likes of Abercrombie & Fitch, which, despite targeting the middle class, will not have an easy task at hand when their operations do start.
The company stock has not fared so well in recent days either as it is currently trading near the 52-week low. Third quarter earnings missed analysts' estimates earlier last month and the stock took a tumble since then, going from $35.38 per share on 6th November to $28.69 on 10th November. It seems like the company is struggling to retain sales, especially amongst its once loyal teen buyers as net sales dropped to $911 million this quarter from $1.033 billion in the same quarter last year. The loss in sales is also a reflection on the company's declining popularity in Europe, where store traffic has been declining. The results have led to Abercrombie lowering its fiscal year EPS from $2.15-$2.35 per share to a range of $1.50 to $1.65.
The Ohio based company's decision to venture into Mexico is a promising start as it marks the company's entry into the Latin American market; a market which they are already late to enter into. It's unlikely that the recession in Mexico will have a significant impact on Abercrombie & Fitch's operations but some level of negative impact is likely to show up. However, their announcement to open up their franchise in Mexico via a deal with Grupo AXO has failed to impress investors who continued to shed shares throughout November and are still doing so in the light of their disappointing third quarter earnings for the year.
Currently the stock trades at $27.84 per share; just 10 cents above the 52-week low after having seen a year high of $45.50 per share. The dismal results and declining popularity of the brand are likely to reflect in trading in the coming days, as the third quarter earnings were failed to meet investors' expectations. The company's decision to open up in Mexico is indeed a smart step but it has failed to appease investors who want to see the company's performance in its current existing market base improve.
The coming year seems to be a difficult one for Abercrombie as it seems like they are hoping that the market environment will change to improve their earnings rather than catering to the changing market trends in the US themselves. Their entry into Mexico is a testament to the fact that they want a market that suits their own needs rather than taking the initiative to evolve for the market on their own.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.