Firm Analysis
To determine if it is viable to invest in a given company, four specific aspects are analyzed about the firm. The aim is to find a business venture that can be easily understood , has long-term prospects that are quite favorable , whose management and operations are carried out by competent and honest individuals and whose prices is attractive and thus making it affordable. The outlined aspects must be satisfied if a business is to be considered a favorable investment option. Abercrombie & Fitch is assessed in terms of these aspects to determine it qualifies to be a good investment option.
Understandability
Abercrombie & Fitch is brand that was established in 1892 with a business aim of supplying rugged outdoor gear. It serves as retailer with focus on upscale casual wear especially for young consumers and has it’s headquarter in New Albany Ohio. Through the exchange of 43 million worth of shares belonging to the Class B stock, it was repositioned by Limited, Inc to become an apparel business that is oriented more towards fashion. The selling of an IPO worth 8.05 million shares belonging to Class A stock made The Limited to have an 84.3 percent ownership. The company is located in more than 300 places across the United States and has still expanding into the international market. The companies also had two offshoot brands under its operations, Gilly Hicks and Reuhl No. 925 but were closed down in early periods of 2015 and 2010 in that order (Hamblin, Kampf, King, Sabah & Stancu, 2015). The company filed declared its self bankrupt in relation to chapter 11 bankruptcies and thereby closing its main store at East 45 street and Madison Avenue in 1997. The name was later revived in 1978. The Abercrombie & Fitch later shifted its focus products belonging to young adults, initially as Limited Brand’s subsidiary and then separately as a public company. It was to become one of the biggest apparel companies in United States. It has consistently maintained a high profile publicity driven by advertising, philanthropic efforts and involvement in various legal battles over clothing style, branding and employment practices. Other big specialty retail firms also gain profits from by extending credit to customers by use of credit cards that are branded (Hamblin et. al 2015).
The retail industry in which it operates consist of very well established retail companies such as TJX Companies (TJX), Ross Stores (ROST) , Lowe’s Companies (LOW), Bed Bath & Beyond (BBBY). Therefore the specialty retail firms focuses on diverse products which include but not limited to the improvement products, beauty and shoes and other supplies. The products also include products such as sporting goods, fashion apparels for both men and women and even toys and teddy bears (The Street Ratings, 2016).
The company operates in an industry whose environment is fragmented, cyclical and highly competitive. Having low entry barriers and few functional differentiation characteristics across various apparel brands, a strong emphasis exists on market efforts and perception of the brand. The main issues in this industry include globalization, economic volatility and the non –traditional channels. The industry continue being competitive in the midst of uncertain global economy and various geopolitical landscapes (Euro monitor International, 2016). The retail industry has been performing better than the overall U.S and global market which has been affected by the slow growth of economy , but these companies face a lot of pressure on demand for apparel just before critical holiday season when shopping is high (Abercrombie & Fitch Co. 2013). The company is also faced with increased risk which relate to international operations where foreign exchange market is very volatile. The emerging markets are facing slow economic growth but the emergence of middle class in such markets makes them more attractive for foreign investment. Companies that want to capitalize on such foreign opportunities are faced with various challenges related to government’s regulations which consist of requirements for local sourcing, restrictions and tariffs on foreign direct investment. Due to economic conditions that are very challenging, the consumers are continuing to be sensitive when it comes to price. This has made companies such as AFN to venture into demographic markets that are new while attempting to consider the various pricing points. The apparel firms that want to penetrate markets that have new pricing methods come across challenges related to the preservation and enhancement of their brand and those that want to enter consumer markets consisting of lower-end user are faced with increased pressure on their profitability (Pricewaterhouse Coopers, 2013). With faster advances in technology the last decade, there is more emphasis for companies such as ANF to consider integration in both digital and physical channels to maintain their competitiveness. Metrics for direct customer sales are the major concern as challenges for facing traditional channels persist. Multi-channel shopping has made possible for companies to continue expanding their margins and take advantage of emerging markets such as China which is leading in the use of internet channels for sales purposes. ANF adoption of online business in way of advertising, social interaction and shopping has enhanced customer data collection useful in the formulating branding strategies for apparel products. Firms which are able to use the information they have on consumer behavior or preferences can personalize products so as to target certain demographic markets (Abercrombie & Fitch Co. 2013).
The Porters model of Five Forces will be used in determining where the power is located within the industry. This is done through a definition of both competitors’ strengths and weaknesses in the market, barriers that can be adopted to prevent the entry of other firms into the market and threat posed by substitutes (Hamblin et. al 2015). The rivalry among the existing firms, threats posed by new entrants and substitutes are high. The customers’ bargaining power is high while that of suppliers is low. The apparel industry categorized into various age sections but the main competitors for ANF is Aerospatiale, American Eagle and Gap which sell same products and services. ANF to some extent reduces their power in terms of controlling buyers and suppliers. The threat posed by new entrants can be attributed to low barriers and no company can be said to have an upper hand in the market. The bargaining power of the consumers is as a result of similar products offered different firms and the same reason leads to high bargaining power for suppliers who are majorly price takers (Hamblin et. al 2015). The rivalry among the existing firms is high due to the many firms in the market competing for the apparel market. The rivalry in this industry can also be attributed to the fluctuating growth rate where it is expected that competition will increase when the rate is low (Zacks, 2013). There have been fluctuating sales in apparel industry over the past decade which has lead to increased competition. The segment of the market has previously been estimated to be around $23.4 billion in 2010 but for the following two years, the growth rates were 2.9 %-7.7% so that revenues picked at $26 billion in 2012. The following two years saw a decrease in revenues – 1.6 percent and 1.4 percent making the total to drop to $ 25.3 billion. The high competition can also be indicated in the market share of the firms in terms of sales whereby ANF controlled 14.8 percent, American Eagle 12.9 percent, The Gap 64.9 percent while Aeropostale had 7.3 percent of the market segment in 2014. For Abercrombie it shifted from 14.8% to 17.3 % and dropping to 14.8 % in total sales for the 3 year period ending in 2014(Hamblin et. al 2015).
There has been an ongoing internal debate in Abercrombie that relates to balancing a premium brand position and competitive pricing in the promotion of store sales. The downturn in economic growth globally has made the issue to be very prominent considering that some competitors have used discounts to a large extent in acquiring market share while ANF continues to struggle with pricing and brand positioning (Abercrombie & Fitch Co. 2013). The company has in past rejected relying on discounts to promote sales as this would lead to diminished brand image. This is why in the past periods – 2009-2010 – the company experienced very low sales especially when compared to its competitors. Currently, the company has seen the close of some stores reducing their number to 3,300 from 3,700. Such closure shows that competition in the industry is very high and is continuing to rise as time passes (Hamblin et. al 2015).
Financial analysis
The Abercrombie & Fitch Company can be rated as a hold. The main factors leading to such a rating are quite mixed with some showing strength, others weaknesses and insignificant proof that can be used to justify the expectation of a positive or negative stock performance as compared to majority of other stocks . The strength of the firm can be seen in various areas like its financial position which is mostly solid with debt levels that are by most measures reasonable, growing profit margins and considerable return on equity. On the other hand, there are weaknesses that counter the identified strengths which consist of a stock performance that is basically disappointing, the firm’s weak growth in earning per share and a net income growth that is not impressive. The company’s debt-to-equity ratio is at a low of 0.28 which is presently below the average in the industry which shows that management of debt levels has been very effective. The quick ratio is adequate, maintained at 1.07 which indicates the capacity to prevent cash problems over a short-term. The firm’s gross profit margin is quite high presently at 68.00 %, even though it dropped slightly as compared to the same period last year. Regardless of the mixed results in terms of the gross profit margin, it largely underperformed in relation to net profit margin at -1.67% which was a significant underperformance as compared to the average of the industry.
There has also been a significant in net income by 1520.9 percent in comparison to the same time a year ago , which is a drop from - $0.81 m to around in net income by 1520.9 percent in comparison to the same time a year ago , which is a drop from - $0.81 m to around $13.13m. In comparison to the same period last year, the 2016 show a significant decrease in Net Operating Cash Flow to about 3.85 per share. In general terms, there was no change in gross profit margin over the 2016 second quarter while net income and sales dropped. The liquidity of the company shows it has increased from the same financial period last year. The equity for stake holders has remained constant over the similar period in 2015 only experiencing a decrease of 4.56 %. These key measurements of liquidity show that it is relatively improbable that the firm will undergo difficulties financially in the foreseeable future. These are indicators of good prospects in future even though the company has many times performed below the average of the whole industry.
In the past, lower results than expected has been attributed to the poor performance of those segments which cater for the fashion needs for teens and women as well as an overall reduction in international and domestic traffic volume. The company had even predicted that it would experience some losses over the following quarter due to the international reduction in sales (The Street Ratings, 2016). In the past the company has experienced large backtracking in its efforts to expand internationally which can explain why the firm has overtime not been experiencing good performance as compared to the overall in apparel industry. The company last year surpassed the estimates put by analysts and therefore it can be expected that it will continue performing well. The company’s sales are forecast to grow fro, $3475million to about %3530 million although the gross million is expected to remain unchanged. Net profit is expected to increase to 2.1 percent in 2017 from 1.6 percent. A recovery on profit can still be attained considering the assumption that improvement will be experienced in the coming half of the financial year (The Street Ratings, 2016). Management has been expecting the results to be better in future which is a positive thing for future prospects (Ritson, 2016).
Company valuation (by stock)
SCORE
|
Factor |
rating |
Weak |
moderate |
Strong |
|
Growth |
2.5 of 5 stars |
|
ü |
|
|
Total returns |
0.5 of 5 stars |
ü |
|
|
|
Efficiency |
2.5 of 5 stars |
|
ü |
|
|
Solvency |
3.5 of 5 stars |
|
|
ü |
|
Income |
5.5 of 5 stars |
|
|
ü |
Management
The company’s management is headed by Arthur C. Martinez who is the Executive Chairman. The chairman has wide range of experience given that he seats in the boards of other recognized institutions (Abercrombie, 2016). He is a non-executive chairman of HSN, INC. He also seats as a member of Northwestern University’s Board of Directors and at Art Institute of Chicago, Greenwich Hospital, Maine Coast Heritage Trust, Chicago Symphony Orchestra Association and Norton Museum of Art Inc. His wide experience was gain from the previous employment at RBS Holdings NV’s Member – Supervisory Board, President and Chief executive at Sears, Roebuck & Co., Independent Director by Pepsi Co, Inc. and various such positions in many reputable organizations. He got his Undergraduate degree at New York University Polytechnic School of Engineering and also an MBA at Harvard Business School.
The Abercrombie management consists of many individuals with wide range of experience especially among the board of directors. The company’s management team used a lot of time a creative director appropriate for the firm who would be placed with the specific demands for interpreting brands origin and foreseeing the a different point of view of concerned with high street fashion . The choice for Aaron Levine was an appropriate move, who was the former designer for menswear at Club Monaco. In fact his initial collection for 2016 spring/summer has attracted lots of praise for its admirable combination of fashion sense and practical cool. The designer has been able to understand the company’s new position and connecting with it. This has brought a sense of optimism around the atmosphere of the company and a sense that the once admired success may not be lost forever. This new management team is doing a great job and they are being recognized as the one who might bring the success again (Ritson, 2016).
Conclusion
ANF Company is quite large and offers a variety of apparel products that serves a very diverse but competitive environment. The company has in the past experienced a big drop in terms of sales and profitability especially due to unfavorable economic environment and the entry of new competitors who came with new marketing strategies that offset AFN’s market dominance. The company has also seen a replacement of management team with one that is organized by brand. The team is expected to turn around the case of poor sales. Regardless of the past poor financial performance, the last financial year saw the company perform fairly better. The returns are thus expected to be favorable in future.
References
Abercrombie 10-k, 2010-2016
Abercrombie & Fitch Co. (2013). Q4 2012 Abercrombie & Fitch Co. Earnings Conference Call. Retrieved from http://www.abercrombie.ca/anf/investors/investorrelations.html
Abercrombie & Fitch Co. (2013). Abercrombie & Fitch Analyst Day Presentation. Retrieved from http://www.abercrombie.ca/anf/investors/investorrelations.html
Pricewaterhouse Coopers. (2013). Retail and consumer trend watch: The shifting sands of going global. Retrieved from http://www.pwc.com/en_GX/gx/retail-consumer/publications/assets/pwc-r-and- -trend watch the-shifting-sands-of-going-global.pdf
Zacks.com, (2013). Abercrombie dressed to disappoint. Forbes. Retrieved from: http://www.forbes.com
Hamblin, N., Kampf, M. King, H., Sabah,N., Stancu, C. (2015).Abercrombie and Fitch Firm valuation and Financial Statement Analysis. Retrieved from: http://mmoore.ba.ttu.edu/ValuationReports/Fall-2015/Abercrombie-Fitch-Fall-2015-5324.pdf
The Street Ratings,(2016).ABERCROMBIE & FITCH. NYSE-ANF. Retrieved from: https://www.thestreet.com/files/r/ratings/equities/ANF_weiss.pdf
Euromonitor International, (2016). Abercrombie & Fitch Co in Apparel and Footwear. Retrieved from: http://www.euromonitor.com/abercrombie-and-fitch-co-in-apparel-and-footwear/report Ritson,M.(2016). Abercrombie & Fitch’s revival will be due to brand revitalization, not brand repositioning. Retrieved from: https://www.marketingweek.com/2016/03/15/mark-ritson-abercrombie-fitchs-revival-will-be-due-to-brand-revitalisation-not-brand-repositioning/
