U.S. Markets closed

Why Abercrombie & Fitch Is a Buy

Abercrombie & Fitch Co.'s (NYSE:ANF) investments in improving the customer experience could strengthen its competitive position.

The apparel retailer is also enhancing its omnichannel offering in order to broaden its appeal among consumers.

The stock's valuation and forecasts indicate it offers recovery potential following its 35% decline over the last year.

560808294.png

Gen Z appeal

The company's continued focus on appealing to Generation Z consumers could boost its financial performance. This group is forecasted to become the largest generation of consumers in the U.S. by the end of 2020, with them currently spending $143 billion per year.

Abercrombie & Fitch is seeking to provide an enhanced experience for Gen Z consumers. For example, it is investing in a seamless omnichannel experience that focuses on the company being accessible across a variety of digital mediums, as well as through its store network.

As part of this initiative, the company is right-sizing, remodeling and rationalizing its store estate in order to improve the customer experience. This involves reducing the size of its existing stores by up to 30%, which has led to a drop in the company's total gross square footage of 17% since 2010.

The retailer's new, smaller stores have resonated with younger consumers. For example, Abercrombie & Fitch's rightsizing of its Hollister stores has led to a high-single-digit sales increase, on average, when their performance is compared to existing stores.

The retailer plans to continue its store optimization program. It is evaluating its larger flagship stores and is committed to closing them as their leases expire.

Read more here:



Enhancing the customer experience

Abercrombie & Fitch's ongoing investments in improving the customer experience could further differentiate its offering versus industry peers. For example, it rolled out in-store handheld devices to staff members in the most recent quarter. This allows employees to quickly order out-of-stock sizes or styles for its customers, which could increase its sales conversion rates.

Abercrombie & Fitch is investing in technology upgrades to its point-of-sale devices in order to speed up its sales process. In addition, it is rolling out machine learning programs that provide size and price optimization tools to its consumers, which is expected to improve inventory efficiency and boost margins.

The business is seeking to differentiate itself from competitors through its increasing use of personalization. It is set to leverage the data it gathers from its loyalty program in order to increase customer engagement through unique offers that may strengthen its competitive advantage.

Possible risks

The company's recent sales performance was disappointing. Its comparable sales were flat in its most recent quarter, while it recorded a 3% decline in international comparable sales. The retailer was negatively impacted by Brexit in Europe, which could continue to cause a softening in consumer sentiment.

Abercrombie & Fitch's sales prospects in the U.S. could be impeded by tariffs placed on Chinese imports, leading to worsening consumer sentiment.

In response to its weak performance in Europe, the company is planning for a hard Brexit. It has tested its systems to ensure it is well prepared for continued uncertainty in the U.K. and Europe, with its financial guidance taking into account potential disruption.

In addition, Abercrombie & Fitch is gradually reducing its dependence on imports from China. In fiscal 2018, 25% of its merchandise receipts were imported into the U.S. from China. The company expects that figure to be under 20% this year. It will continue to engage in this process, and expects to further diversify its manufacturing footprint away from China over the long run.

Outlook

The stock is forecasted to record a 74% increase in earnings per share in the next fiscal year. The forward price-earnings ratio of 18 suggests it offers a margin of safety.

Abercrombie & Fitch's investment in improving the customer experience and in enhancing its appeal among younger consumers could lead to a successful recovery in its stock price.

Disclosure: The author has no positions in any stocks mentioned.

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

This article first appeared on GuruFocus.