Abercrombie

The Two Reasons Abercrombie & Fitch Co. Will See Their Shares Slide in 2016

Abercrombie

After Mike Jeffries, the company’s Chief Executive Officer, resigned on the 9th of December, Abercrombie & Fitch Co. saw their shares rise approximately 6 percent. Jeffries has headed the retailer of teen apparel for more than twenty years, which resulted in the company losing out market share to its competitors. They lost touch with the market and their PR efforts were disasters. In 2013, Abercrombie & Fitch Co. saw their sales decline by 11 percent versus 2012, when the company’s sales dropped by 1 percent. In 2011, sales increased by 5 percent, while 2010 saw growth of 7 percent. Between 2010 and 2013, the company saw their revenues climb by 19 percent, while net income gained 65 percent.

While the exit of Jeffries was a good thing for investors, so far no announcement about a possible replacement has been made. For the moment, Arthur Martinez, Executive Chairman, is heading the management team and will be in charge of daily operations. He used to the Chief Executive of Sears, Reobuck and Co, which failed. With the stock falling by 19 percent over the past year, some might say there will be sunlight after the storm passes. However, the stock could drop further as there are two more obstacles the company will face in 2016. Abercrombie & Fitch Co. doesn’t appeal to teens anymore. They’ve lost their touch.

A survey conducted in the fall by Piper Jaffray among 7,200 teen shoppers showed that Abercrombie & Fitch Co. didn’t rank among the top brands for teens and in spring, it was ranked 10th. Their California style fell from 5th to 7th in the spring. The reality is that they are top ranking in brands girls choose not to wear anymore. However, the good news is that they have a lot of experience in reinventing themselves, which they did in the late 80s with sports brands from Limited brands. This reinvention was highly successful until the 2000s great recession hit.

Due to the recession, teens were drawn in by cheaper brands such as Zara, Target and H&M. This is why Target got the ranking previously held by Abercrombie & Fitch Co. in the Piper Jaffray survey, namely position number 10. Abercrombie & Fitch Co. didn’t drop their prices right away in 2009, leading to a drop in sales of 29 percent. When they found they didn’t have a choice but to match the prices of their rivals, their margins were basically destroyed. They announced in 2012 that they would be focusing on Asia and Europe through the closure of 180 US stores by 2016.

International sales during the last quarter accounted for 35 percent of net sales, which dropped by 12 percent on year over year basis as comparable international sales dropped by 22 percent and US revenues slipped by 12 percent, with comps dropping 10 percent. By comparison, Gap saw sales decline by 2 percent, while American Eagles saw a 5 percent drop during the previous quarter. Gap is weathering this slowdown with a three-tiered approach. Old Navy has had stronger sales that have counterbalanced the poorer sales generated by Banana Republic. Abercrombie & Fitch Co. don’t have a similar strategy in place.

With a permanent Chief Executive Officer, Abercrombie & Fitch Co. is unlikely to experience a significant recovery. Teen shoppers aren’t interested and price reductions aren’t doing anything to slow down the decrease in sales. Abercrombie & Fitch Co. might still have value, but it really needs a massive and dramatic change in strategy. The problem is that things could get a lot worse before they get better.


About

Frasier Brisson is a Lead Analyst who joined Micro Cap Mag in 2014 and covers the Consumer and Retail sectors. Prior to joining the company, Frasier was an internet analyst at Stifel Nicolaus.


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