Tricky Turnaround for This Teen Retailer
Abercrombie & Fitch is increasing profitability, but top-line losses continue.
Abercrombie & Fitch (ANF) posted a first-quarter comparable sales decline of only 4%, much better than peers American Eagle (AEO) and Aeropostale (ARO), whose comp sales fell 10% and 13%, respectively. Additionally, the profitability-improvement initiative continued to play out, with the stand-alone Gilly Hicks store closures (24) substantially completed and the plan contributing to a $37 million decline in adjusted operating expenses. As management has proved its ability to execute on its strategic plan in the quarter and has already begun to see some positive results, we will probably make no material change to our $40 fair value estimate. We recommend investors wait for a wider margin of safety, because we believe performance can be volatile in the midst of significant restructuring efforts and the company has no sustainable competitive advantage in an overcrowded space facing a challenging and fundamentally shifting target market--the basis for our no-moat rating.
The profitability-improvement initiative is on track to deliver $175 million in annual savings. However, we think some of this upside will be offset by at least $30 million in additional marketing investments that we view as necessary to reposition the brand and re-energize its customer base. The store base is now being managed strategically. For 2014, we expect four additional stores in outperforming China, two Hollisters in Japan, and additional openings in the Middle East. Management continues to expect to close 60-70 stores in the United States through natural lease expirations and notes that 500 of the 840 U.S. leases are up for renewal between now and the end of 2016, yielding significant flexibility in rightsizing the store base. Thus, we think there is additional long-term upside to the announced savings.
Bridget Weishaar does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.