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Bull of the Day: Abercrombie and Fitch (ANF)


Abercrombie and Fitch (ANF) is in the midst of a successful reinvention.

You don’t have to be too old to remember the days when the Abercrombie image consisted of attractive young models spritzing fragrances on passerby in front of nightclub-themed mall stores. Though the strategy seems dated now – how many mall shoppers want to be accosted by a shirtless guy with a bottle of perfume? – it actually worked well for a while and Abercrombie became one of the world’s most popular brands of clothing and accessories for teens and young adults.

By 2014, management at Abercrombie astutely realized that they were going to need a new strategy in order to continue to appeal to the notoriously fickle tastes of younger consumers. The result is a new digital approach that uses a diverse set of media outlets to support the company’s brands and styles and keep them relevant to their target audiences and also provides a convenient and easy way for those consumers to buy goods directly from the company.

The Brand Strategy

ANF operates three separate brands – Abercrombie and Fitch for the 21-24 age group, Hollister for teens and college students and Abercrombie Kids, targeting consumers from 7-14 (or their parents.)

The new strategy involves closing underperforming retail locations and remodeling existing locations to utilize a smaller footprint. It also emphasizes direct-to-consumer sales through the company’s digital “omni-channel,” which was designed to create a best-in-class customer experience while simultaneously growing profitability.

Abercrombie closed 29 stores in 2018 and plans to shutter 40 more in 2019. In most cases, store closures happen when a poorly performing outlet reaches the end of its current lease, greatly reducing the cost of shuttering locations.

Approximately 50% of existing store leases expire within the next three years, providing the company flexibility in their decisions to keep or close individual stores.

The new marketing effort focuses heavily on internet and social media channels and a reduced presence in traditional media. The company uses “influencers” on Twitter, Instagram and other platforms and recently produced an original Television series for YouTube. Broadcast on their “Awesomeness TV” channel, “The Carpe Life” features appealing glimpses of teen life while subtly including the companies wares.

After a difficult stretch in 2016 that was highlighted by four consecutive earnings misses due to slow sales and rising expenses, Abercrombie has been on a tear ever since, surpassing the Zacks Consensus Earnings Estimate eight consecutive times, highlighted by a 20% beat in the first quarter of 2019.

Net Q1 earnings at Abercrombie were $1.35/share versus an expected $1.12/share. Revenues were $1.16B, slightly topping estimates of $1.13B. The earnings improvement was largely the result of the cost saving of operating fewer retail locations and selling more product online. Roughly a third of sales occur through the online portal.

Same-store sales increased for a sixth straight quarter – a predictable outcome given the closure of low-performing retail locations. Full year Store Operating Expenses across the company in 2018 were $629M, a significant reduction from 2017’s $659M.

Abercrombie’s guidance for 2019 prompted an immediate runup in the shares, which rallied 20% the day following the Q1 report.

The company expects net sales to increase 2-4%, same-store sales up “low single digits,” and gross profit to continue to increase.

Analyst expectations for the coming two years increased almost immediately after the Q1 report. The Zacks Consensus Estimate for full year 2019 has risen 42% since before the most recent report and the estimate for 2020 is up almost 100%.

Abercrombie has gone in a decidedly high-tech direction when it comes to attracting and retaining customers and the results in terms of earnings and share price have been encouraging. The stock price remains well below the 2007 highs of $84/share – the last time it was on top of the apparel retail world – but given their unique and innovative approach, they’re headed in that direction again.

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