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Is Abercrombie & Fitch the Best Teen Retail Stock?

July 22, 2014 | About:

Abercrombie & Fitch (NYSE: ANF) has surprised the market with its performance this year. The teen retailer was down in the dumps in 2013, but it gained almost 16% so far in 2014. In fact, Abercrombie has outperformed the likes of Aeropostale (NYSE: ARO) and American Eagle (NYSE: AEO) by a huge margin. Its results have been strong, and the turnaround strategies look impressive, which is why there's a good chance that Abercrombie might continue performing well in the future.

Better than expected
Abercrombie posted better-than-expected results in the first quarter. Its sales fell 1.9% year-over-year to $822.4 million. This was well-ahead of analysts' estimates of $796 million. In addition, Abercrombie reported a loss $0.17 per share for the quarter, which was less than the consensus estimate of $0.19 per share.

Also, the company performed much better than American Eagle and Aeropostale, whose sales declined comparatively steeply in their respective quarters. The retailer is taking various strategic initiatives to turnaround its business and get back on the growth track. With the way things turned out in the previous quarter, it looks like its strategies are working.

Teens are Abercrombie’s target customers. However, due to a challenging economic environment, they are falling short of money. Moreover, teens are losing interest in logo-centric clothes, while the advent of online shopping has also led to a change in shopping behavior. As a result, Abercrombie is going to close around 60 to 70 stores in the U.S. and remove logo-centric clothing to align itself with the current trends.

Expansion moves
Abercrombie is also looking abroad for growth, especially in Asia. It has expanded its presence in Asia with its new A&F flagship store in Shanghai. This new store has received a positive response from customers, reflected by addition of over 30,000 new Weibo followers after its opening.

Its Hollister stores in China are doing well, so Abercrombie plans to open four additional stores in China this year. Its direct-to-consumer business is also growing at a fast pace in China, and management believes that it will get better with the launch of its local website.

Abercrombie's other international markets are also doing well. Sales volumes at its Japanese Hollister stores were better-than-expected in the previous quarter. Now, the company is going to open two additional stores in Japan as it sees significant growth opportunity.

Also, Abercrombie entered the Middle East with its first Hollister store in Dubai. In fact, this store recorded the highest Hollister volume globally. After such an encouraging performance, the company is looking forward to opening more stores in the Middle East.

To improve its performance further, Abercrombie has increased its focus on marketing. It has announced the opening of Hollister House as a key part of its new Hollister marketing campaign. This new concept will support major digital marketing campaigns across multiple platforms.

The company also plans to invest in its stores as a part of its initiative to increase brand engagement. Its test stores put in a firm performance, and consequently, it plans to roll out the new design in 75 to 100 stores by the end of the year.

Ahead of peers
On the back of such strategies, Abercrombie seems to be pulling ahead of its peers. As we saw above, its revenue decline was marginal on a year-over-year basis. In comparison, Aeropostale's sales fell 12% year over year, while American Eagle's top line dropped 5%. In fact, Aeropostale has decided to close a massive 125 P.S. stores this year as it undergoes course correction and aligns itself with current market trends.

Aeropostale will now be focusing on the P.S. brand through other sales channels, including off-mall locations, e-commerce, and international licensing. In addition, the retailer will add more labels to its portfolio going forward. These moves might result in improvements, but Abercrombie has already implemented such measures and is aggressively focusing on its digital marketing moves.

However, Abercrombie needs to keep a close eye on American Eagle, which is making some smart moves. American Eagle is testing a buy online and ship-from-store pilot program. The company claims that this program has received positive feedback. Moreover, American Eagle is also reducing inventories and is improving its pricing strategy by running promotions on selected merchandise, apart from increasing product assortment.

The takeaway
Abercrombie is confident that the strategic moves it is making, such as investing in key international markets, restructuring and repositioning its U.S. stores, and reducing costs, will help the company drive significant improvements. As such, investors should take a look at Abercrombie as it looks like a good turnaround play.

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