International expansion at youth apparel retailer Abercrombie & Fitch (NYSE: ANF ) is more crucial than ever, as the company's flagship brand finds fewer domestic opportunities. This edition of "Fool on Call" will examine the latest updates on Abercrombie's global plans from its recent conference call, and catch up with the retailer's RUEHL division and a new brand code-named "Concept 5."
One of the qualities I appreciate about A&F is how methodically it's run. The company's international presence, or lack thereof, may spring from that steady, cautious approach. This brand's arguably the envy of its peers, having enjoyed many years of success in the United States. But instead of trying to push into international markets too early, A&F first sought to maximize domestic opportunities. After many years of success in that arena, it can now focus greater attention on foreign outreach.
I believe this development approach is important for two reasons, First, by focusing on its domestic footprint, the company tapped into existing distribution systems and leveraged its cost structure in the U.S., squeezing every dime out of its capital investments. Second, by dominating the U.S. market and making a powerful name for itself, A&F has established the kind of momentum needed to launch stores in new markets.
The call revealed several locales where A&F is "aggressively" seeking real estate, including Italy, France, Germany, Spain, Denmark, Sweden, and the U.K. A&F is also focusing a great deal of attention on Japan, starting with the Ginza district in Tokyo.
One size fits all
The company will employ its standardized high-volume store model in international markets. In the Q&A portion of the call, management indicated that there would be "no difference" in product assortment or floor models between Japanese and U.S. stores.
A&F hopes that this standardized model will lead to the same success abroad that it's enjoyed at home. In a prepared statement, CFO Mike Kramer pointed to recent performance from new stores in Canada and the U.K. as a validation of the model.
The standardized approach, while certainly a cost-saver, still has its flaws. A certain store model's success in the U.S. won't always translate in different markets and cultures. Witness Google's (Nasdaq: GOOG ) efforts to reflect local culture on search pages for a respective country, or Nike (NYSE: NKE ) and YUM! Brands' (NYSE: YUM ) KFC's success in China after employing strategies adapted to their new environment.
I'm guessing that Abercrombie's management wouldn't employ a standardized model if it didn't have the research to support such an approach in new markets. We'll know soon enough how that approach works out.
RUEHL and "Concept 5"
Both the A&F and Hollister brands are in the early stages of international expansion, promising many more years of solid growth. But even as it grows its core brands, A&F is also intent on developing new ones.
The relatively new RUEHL brand has struggled out of the gate, but recent changes to the store design are expected to turn things around. Thankfully, the company plans to ditch the stores' existing multi-floor model in favor of a traditional single-floor style. This should make the stores more easily navigable and cheaper to build. In addition, new RUEHL stores set to open in Annapolis, Md., and Washington Square (in Oregon), among others, will be smaller than the originals.
There was still no mention, however, of any efforts to further differentiate RUEHL merchandise from A&F, something I've argued is sorely needed. Nonetheless, the recent store improvements are expected to help the concept finally turn profitable by Q4 of this year.
And as far as "Concept 5" goes, Kramer assured analysts during the Q&A that "we are investing more in 'Concept 5' than we did in RUEHL from an upfront stage, but hopefully that will secure quicker success." Given RUEHL's early failures, we can only hope so.
Still worth a look
I've leveled criticism at Abercrombie in the past, but I still believe it's one of the finer retailers on the market. With RUEHL improving, a new concept under way, and aggressive international expansion imminent, I can see at least three solid reasons to consider Abercrombie as a possible long-term investment.
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