Why Abercrombie & Fitch Could Beat the S&P 500
- By Robert Stephens, CFA
Changes to Abercrombie & Fitch Co.'s (ANF) strategy could enhance its stock performance. The retailer is innovating through the release of new product lines, while ramping up integrated marketing programs to leverage user-generated content. It is also seeking to enhance the customer experience in order to improve customer loyalty.
Further investments in omnichannel capabilities is expected to enhance digital sales. This includes leveraging its inventory, while investments in its stores alongside a rationalization of its estate is leading to improved levels of productivity.
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The intrinsic value of ANF
Although risks remain from the trade war between the U.S. and China, the company has flexibility in its manufacturing footprint, which could help it to overcome the threat of increasingly protectionist trade policies.
Having risen 5% in the last year versus a 1% increase for the S&P 500, the stock has investment appeal.
Improving strategy
An evolving strategy has the potential to boost Abercrombie & Fitch's financial performance. It is seeking to innovate through several new products, including the Ultra coat. The line's launch event resulted in more than 190 million impressions across social media. In addition, the collection has delivered some of the company's top-performing outerwear sales in recent months.
Abercrombie & Fitch is also ramping up integrated marketing programs in order to leverage user-generated content. As part of this initiative, the company is working closely with influencers like TV personality Giuliana Rancic.
The company is also working on improving the customer experience through marketing investments. This includes the global rollout of its loyalty program, which already has 23 million member accounts across both of its brands. As the retailer gains more insight into its core customers' tastes, it can use this information to better form localized planning, merchandising and marketing functions.
Investment
Abercrombie & Fitch is investing in its omnichannel capabilities. It has seen an increase in customers purchasing goods online and picking up in store, as well as ordering in-store for home delivery. It is in the process of launching its omnichannel capabilities globally, expecting to report $1 billion in digital sales in fiscal 2018. The retailer is also continuing to leverage shipping costs on direct-to-consumer sales, which are being driven by its transformation efforts. Further investment in its mobile app is planned as it is the company's fastest-growing digital platform, accounting for over 75% of digital traffic in the third quarter.
Investments in stores is aiding the overall brand experience. Abercrombie & Fitch's new and remodelled Hollister stores are driving improving levels of customer engagement. In addition, the opening of its first mall-based prototype in the U.K. is acting as a gateway to the brand being able to drive incremental digital sales growth. The retailer is also overhauling its real estate. In the third quarter, it delivered 28 new store experiences for customers. The company also estimates to have closed 40 stores in fiscal 2018 as part of its plans to consolidate as well as improve productivity.
Risks
The potential for additional tariffs on imports from China could hurt the financial performance of the business. It anticipates that around 25% of its goods will have been imported into the U.S. from China in fiscal 2018. Although it continues to see only a minor direct impact from the tariffs implemented so far, the potential for a full-scale trade war could cause investors to become increasingly cautious about its future prospects.
Should tariffs pose an increasing threat to the company's profitability, its diverse manufacturing base could be leveraged to reduce the overall impact. Abercrombie & Fitch currently has a diverse supplier base across 17 different countries. It could, therefore, shift production away from China and toward other countries that are not subject to the same level of tariffs. It also has the potential to work with new suppliers over the long run, though this strategy would take time to successfully implement and may cause costs to rise.
Verdict
Increasing investments in omnichannel capabilities and its stores could catalyze Abercrombie & Fitch's financial performance. In doing so, the company is seeking to enhance the customer experience and improve productivity.
An evolving strategy includes greater product innovation as well as an enhanced marketing program. The global debut of its loyalty program could provide valuable insight, allowing the company to enhance its offerings to core customers.
Although there are risks of additional tariffs on imports from China, the company has a flexible manufacturing base which could offset the threat of a potential trade war.
Having outperformed the S&P 500 in the last year, the stock may be able to extend its lead over the index in the future.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Sign with ANF. Click here to check it out.
The intrinsic value of ANF
