Abercrombie sees long-term value in Europe

The slowing down of the apparel retailer's European plans is only a near-term solution.

By Trefis Jul 18, 2012 9:26AM
TrefisTeen apparel retailer Abercrombie & Fitch's (ANF) stock gained nearly 5% last Wednesday amid reports of a massive buyback program and the company's decision to cut back on its European expansion plans.

While the exact size of Abercrombie's repurchase plan isn't clear yet, there is speculation that it could be as much as 15% of its current float. Additionally, the company's decision of cutting back its European expansion plans was also well received by investors, who until now have been highly skeptical of Abercrombie's aggressive growth plans in the region.

Abercrombie & Fitch Stock Break-Up

Is Abercrombie's European strategy misplaced?

Over the past three quarters, Europe has proved to be a major impact factor for Abercrombie & Fitch. With last Wednesday's gain also coming on the heels of a cut-back to its European growth plans, an important question that arises is whether Abercrombie's strategy in Europe is misplaced?

A quick answer in the current scenario may be yes and that Abercrombie should cut short its European growth ambitions, but it's important to analyze the stock pattern for the past couple of years before we come to a conclusion.

Let's rewind back to mid 2010 when Abercrombie's stock was at similar levels as it is currently. From that time until November 2011, the stock grew by an astonishing 120%, despite cost-related concerns due to a spike in cotton prices that tanked the stocks of peers Aeropostale (ARO) and Gap (GPS).

The primary and the most meaningful catalyst for this sharp uptick was the tremendous growth in its international business -- a major part of which came from Europe. Abercrombie's international store count more than tripled from 28 in 2009 to 99 in 2011, and its international sales grew by a staggering 97% and 75% in 2010 and 2011, respectively. In contrast, the domestic sales grew by just 7% and 6% in 2010 and 2011, respectively, and had very little contribution to the stock's growth.

We think that the slowing down of its Europe plans is only a near-term solution as it won't eat up the company's cash. But traditionally Abercrombie has known no other way of growth other than international expansion. The domestic conditions aren't much favorable for the company either, as competitors such as American Eagle (AEO) are breathing down its neck with their better merchandise pricing. Additionally, wavering consumer confidence is also adding to the company's woes in the U.S.

So while Europe may have its own problems for now, Abercrombie cannot afford to look past Europe forever. As the macro-economic uncertainties surrounding the debt crisis subside the company will likely resume its expansion plans in the continent. And by postponing its growth plans for now, Abercrombie can maximize its return on investment potential in the long run.

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