The lack of visibility on merchandise strategy may further pressure shares of Abercrombie & Fitch Co. (NYSE: ANF), which dropped 34 percent in the last six months. The retailer is late to the party on many aspects.
Based in New Albany, Ohio, Abercrombie & Fitch operates as a specialty retailer of casual apparel for men, women, and children under the brand names of Abercrombie & Fitch, Hollister, abercrombie kids, and Gilly Hicks.
For investors, a disciplined inventory strategy is top of mind for 2014 while the company's buzz word was "speed" with a huge focus on improving sourcing and testing nearly 100 percent of the product assortment.
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"While we think improving speed is critical in the face of ANF's soft sales and margins for the last 5 years, it just levels the playing field (as its competitors have already been focused on this), and it really comes down to product," UBS analyst Roxanne Meyer said in a client note.
The company's key initiatives include new marketing (testing for Hollister this holiday; rollout for A&F/Hollister summer 2014); new store fronts; relaunching the loyalty programs with rewards; relaunching websites; and omni-channel inventories (chain rollout in fall 2014).
The timing for some of these initiatives is unknown, and others seem pretty far out from now. Moreover, the market remains skeptical whether ANF's infrastructure is prepared to support all of these initiatives.
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"We note there has been no change in the team, and CEO Mike Jefferies announced he plans to stay on board, which had been a question in many investors' minds," Meyer noted.
There was a lack of details on how the product assortment is going to change aside from women's tops being the biggest opportunity for improvement. Management's timeframe to improve the fashion relevance ! is back to school 2014, still a long time to wait and see.
In addition, the company's focus to improve the relevance of core product may not move the needle as much as hoped given that it is a down trending category across teen. The initiative to reduce the number of floorsets and SKUs seems like a step backwards as it could lead to increased markdown risk with more investment in depth (rather than breadth).
"It seems counterintuitive given that ANF now acknowledges it needs to compete more efficiently vs. fast fashion retailers. Perhaps the focus on store payroll is driving this decision," Meyer said.
The company recently guided to 300-500 bps of operating margin opportunity coming from improving the US business longer term, which is about 40 percent of the total 750-1,250 bps opportunity for margin improvement.
The outlook seems tough to achieve due to limited comfort in ANF's ability to raise average unit retails (AURs) without a meaningful improvement to product.
ANF expects to close 40-50 underperfoming US stores/year while opening 40 smaller ones over the next several. International growth now includes franchises in "tougher markets."
"Management also mentioned testing a store within a store concept for ANF kids, which we don't believe will be received well by A&F's customers," Meyer noted.
Internationally, management admits that Europe is near maturity, and the main focus is on Asia, which could represent $1 billion in sales longer-term. Initially, the focus is on China (FY14: 4-6 stores; target: 100+ stores) and Japan (FY14: 3-5 stores).
"Management also discussed expanding to outlets, which we think could dilute an already fragile and heavily promoted brand. We view outlets (particularly the focus on made-for-outlet product) as a distraction as ANF works to fix the merchandise in its core businesses," Meyer added.
The company has multiple levers (albeit on a long-term basis) to boost its profitability and margins that should help to offs! et extern! al challenges. Management is taking a close, hard look at essentially every aspect of the business. As the findings from this thorough review are implemented, ANF could emerge as a more nimble, agile retailer both in terms of its ability to react on the product side and to leverage its cost structure.
However, as of now, investors may remain on the sidelines given low visibility through the first half of 2014 and the lack of details on improving product and the timeline for speed initiatives.
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