A Few Reasons Why Abercrombie & Fitch Can Stage a Comeback

Despite a lackluster quarter, Abercrombie might prove to be a rewarding investment in the future.

Apr 14, 2014 at 11:03AM

Although the retail industry is going through a difficult phase, businesses are trying their best to grow their top line through increased promotional activity. One key problem during this holiday season was the ever-growing popularity of e-commerce, which allowed customers to shop from home and have their goods delivered to their doorstep. Therefore, many specialty retailers, including Abercrombie & Fitch (NYSE:ANF), Gap (NYSE:GPS) and Urban Outfitters (NASDAQ:URBN), have started focusing more on their online businesses in order to cash in on the Internet.

Thus far it's unclear how much these efforts are paying off at least for specialty apparel retailer Abercrombie & Fitch as the company has been struggling to save itself from declining revenue in recent periods. 

Mixed results
Its recently reported fourth quarter was another mixed bag as revenue plunged 12% over last year to $1.3 billion, while analysts had expected $1.36 billion. The key reasons for the decline were lower mall traffic as cold weather kept people at home, and weak consumer confidence that led people to spend less, especially on clothing.

Other contributors to the revenue drop were unique to the company. For example, Abercrombie mainly caters to teenagers and has limited size offerings. Therefore, people the company is unable to cater to a large section of people. Moreover, the retailer's products aren't keeping up with the changing trends in fashion, which keeps customers away from its stores. These factors contributed to a same-store sales decline of 8%.

Although its bottom line dropped significantly to $1.34 per share in the fourth quarter, from $1.95 last year, it was ahead of analysts' expectation of $1.05 per share. This was mainly due to Abercrombie's cost-cutting measures that are expected to save $175 million, on an annual basis, in the future.

Much-needed efforts
The apparel retailer increased its promotional efforts and offered deep discounts in order to lure customers to its stores. Although this strategy affected margins, it probably enabled Abercrombie to avoid an even harsher sales drop, and helped the company beat analyst estimates on earnings.  Moreover, resorting to lower prices was important since most of Abercrombie's industry peers were doing the same thing.

For instance, peer Gap also offered huge discounts that attracted customers, resulting in same-store sales growth of 1% in its recently reported quarter. However, offering lower prices reduced the bottom line by 7%, to $0.68 per share. Gap is also working harder to win customers' attention, including by expanding its footprint, enhancing its product portfolio, and strengthening its e-commerce business. Moreover, Gap has an added advantage over Abercrombie and other teen-focused retailers since it caters to a variety of U.S. customers, from all age groups, rather than aiming its sales solely at teens.

Other players such as Urban Outfitters are also focusing on e-commerce. Urban Outfitters' moves include launching mobile apps to make online shopping easier, including Urban On during the third quarter and the FP Me app in June of last year. The FP Me app has become quite popular with the addition of 165,000 members since its launch. Moreover, features such as responsive design have made Urban Outfitters apps even more successful among customers. The retailer witnessed 7% jump in its website traffic, along with a surge in average order value placed by customers, in its third quarter results. .

Even Abercrombie plans to focus on its e-commerce operations by developing a faster and an efficient online portal, in collaboration with IBM. This is in addition to launching mobile apps which enables customers to shop through their cell phones. The company also plans to expand its product portfolio. Its direct-to-customer segment grew 18% during the quarter and the company plans to boost it further. Also, the retailer will launch plus-size apparel and offer footwear in the months to come. This means the company should now cater to a larger section of people.

In addition, Abercrombie has partnered with other retail brands in order to expand its apparel selections. Partnerships with brands such as Hollister have been quite successful. Other movies include restructuring the business and shutting down its Gilly Hicks stores by the end of fiscal first quarter of 2014.

Plans galore
Abercrombie has a list of other moves planned for the future, including increasing its international footprint by 16 stores, seven of which will be in China .

The company said it would remain focused on a few strategies, including continuing to provide lower prices since premium product costs were one reason customers shifted to other retailers. Second, the company will emphasize its women's category to counter falling sales in this segment.

Additionally, the retailer is planning a marketing campaign featuring popular celebrities, helping to grab customer attention. Lastly, it will continue cost-saving measures so that it can offer products at lower prices without hurting the bottom line.

My take
Abercrombie is indeed going through a difficult phase in which lower consumer demand has resulted in significant loss of sales. It is not doing as well as peers such as Gap. However, the teen-focused retailer is making a host of efforts to stage a comeback. It's too early to say how lower prices and other moves will fare. Until then it is prudent for investors to wait for the company's efforts to bear fruit before jumping into the stock.


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Pratik Thacker has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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