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Abercrombie to Boost Customer Experience With Klarna Deal

Zacks Equity Research

Abercrombie & Fitch Co. ANF unveiled the expansion of its existing multimarket partnership with Klarna, a leading global payments provider. Per the deal, Abercrombie’s U.K. customers will now have access to Klarna's Pay in 3 product at the company’s three renowned brands, Abercrombie & Fitch, abercrombie kids and Hollister Co. The customers can pay for purchases made at these stores in three installments within a two-month time period.

Meanwhile, the company’s clients in the United Sates can take benefit of Klarna's Pay in 4 product. These customers can pay in four installments for their purchases in a two-month span. Currently, Abercrombie’s customers in Germany have access to Klarna's Pay Later service, which gives shoppers an option to pay within 14 days after the order is delivered.

According to management, the company aims to deliver attractive, seamless brand experiences from product discovery to checkout and fulfillment. While customers in Germany are already availing the benefits of this unique partnership, Abercrombie is set to begin a new chapter of its association with Klarna, bringing new deals for the U.K. and U.S. customers.

Apart from these, Abercrombie is looking to enhance store productivity, which led to significant store closures in the past eight years. The company expects these closures to improve store productivity by reducing store occupancy costs. In fact, the global store optimization is a key component of the company’s efforts to ensure operating margin expansion and achieve its goals for fiscal 2020. For the next two years, it has identified lease expirations for nearly 50% of its stores in the United States. Simultaneously, it expects to consistently invest in the enhancement of store experiences, mainly through new store prototypes, remodeled stores and right-sizes. In fiscal 2019, Abercrombie plans to deliver about 85 new experiences.

The company’s capital investments, cost-saving efforts, loyalty and marketing programs are gaining traction. Moreover, it has been making significant progress in expanding digital and omni-channel capabilities. Investments in mobile, omni-channel and fulfillment have significantly provided a boost to its digital business. Notably, the digital business continued to perform well backed by robust momentum across Abercrombie’s brands and geographies. In first-quarter fiscal 2019, digital channel sales contributed 30% to revenues.

However, the company is witnessing higher operating expenses and adverse currency fluctuations. First-quarter results were somewhat hurt by adverse impact of foreign currency, which is likely to persist throughout fiscal 2019. Currency is expected to hurt sales by $10 million in the second quarter and $30 million in fiscal 2019. Additionally, soft sales and gross margin outlook for the fiscal second quarter hurt investor sentiment.

Management anticipates sales to be flat to up 2%, down from 8% growth registered in second-quarter fiscal 2018. Comps are anticipated to remain flat compared with an increase of 3% in the prior-year quarter. Gross margin is likely to contract nearly 100 basis points from 60.2% reported in the year-ago quarter.

Consequently, shares of this Zacks Rank #3 (Hold) company have plunged approximately 40% in the past three months, wider than the industry’s 18.7% decline.

Key Picks

The Children's Place, Inc. PLCE has a long-term earnings growth rate of 8% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Zumiez Inc. ZUMZ has a long-term earnings growth rate of 13.5% and a Zacks Rank #2 (Buy).

L Brands, Inc. LB has a long-term earnings growth rate of 11% and a Zacks Rank #2.

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