The document provides an analysis of Abercrombie & Fitch (A&F), including: 1) An overview of the apparel sector and A&F's competitors such as Inditex, H&M, and Gap. 2) A history of A&F and details on its brands focused on young consumers. 3) Financial information showing A&F's reliance on the US market for 81% of its sales.

1. Abercrombie & Fitch
Strategic and financial analyses

2. Execu&ve
Summary
• Introduc&on:
aims
of
the
analysis
• The
sectoral
analysis:
– Key
figures
&
main
compe&tors
– Trends
and
legal
evolu&ons
• The
company
analysis:
– A&F
presenta&on
– A&F
strategic
analysis
• A&F
financial
analysis:
– Accoun&ng
data
and
ra&os
changes
– Financial
data
and
business
analysis
• A&F
valua&on:
– Mul&ples
– DCF
• Conclusion:
what
we
think
of
A&F
investment
opportuni&es
Financial
diagnosis
A&F
2012
2

3. Introduc&on:
aims
of
this
analysis
• This
analysis
aims
to:
– Present
data
on
the
apparel
market,
– Present
precised
informa&on
on
the
firm,
– Present
selected
figures
on
the
company,
– Present
detailed
ra&os
and
cash-­‐flow
calcula&ons,
– Valuate
A&F,
and
…
conclude
on
the
investment
opportuni&es
Financial
diagnosis
A&F
2012
3

4. SECTORAL
ANALYSIS
Financial
diagnosis
A&F
2012
4

5. Sectoral analysis: the apparel
industry
1. Global apparel market
2. Main competitors and their strategies
3. Macroeconomic and legal constraints
4. Innovation
5. Seasonal cyclicity
Financial
diagnosis
A&F
2012
5

6. Global apparel market
Apparel
US$ 1,542 bn
Childrenswear Hosiery Closing accessories Men’s Outerwear
US$ 146 bn US$ 49 bn US$ 66 bn US$ 373 bn
Mens Underwear,
Nightwear and Women’s Undervear,
Swimwear Women’s Outerwear Nightwear and Footwear
US$ 500 bn Swimwear US$ 287 bn
US$ 37 bn
US$ 85 bn
Financial
diagnosis
A&F
2012
6

7. Main Competitors and global
market shares
Companies 2010 % market share
Nike 1.9
Adidas 1.8
Inditex 1.1
H&M 0.9
Gap 0.9
Cofra Holding 0.6
Fast Retailing (Uniqlo) 0.5
Levi Strauss 0.4
Limited Brands 0.4
VF Corp 0.3
A&F 0.2
=> A split up market Financial
diagnosis
A&F
2012
7

8. Nike/Adidas: Sportwear brands
• Nike Inc.
– a major publicly traded clothing, footwear, sportswear, and
equipment supplier based in the United States
– the world's leading supplier of athletic shoes and apparel and a
major manufacturer of sport equipment
• Adidas AG
– a German sports apparel manufacturer
– the largest sportswear manufacturer in Europe and the
second-biggest sportswear manufacturer in the world
=> Both companies are mainly operating on the sportswear
market and therefore are not A&F’s direct competitors
Financial
diagnosis
A&F
2012
8

9. Inditex/H&M
• Inditex
– a large Spanish company and the world's largest fashion group
– runs over more than 5402 stores worldwide and owns famous brands such
as Zara, Massimo Dutti or Pull and Bear etc.
• H&M
– a Swedish retail-clothing company, known for its fast-fashion clothing
offerings for women, men, teenagers and children
– the second largest global clothing retailer, just behind Spain-based Inditex
and leads over third largest global clothing retailer, United States based
GAP Inc. (ranking without sportswear companies)
=> Both firms operate on the ready to wear retail market of casual clothing
(day to day clothes) and therefore are direct competitors of A&F
Financial
diagnosis
A&F
2012
9

10. Gap
• Gap Inc
– A&F’s main competitor in terms of clothing style
– Its clothing range has a preppy style, which is typical of
American university students
– Gap’s namesake fascia aims to have a similar style, but it has
struggled to attract a younger consumer in its home market
=> The firm operates on the ready to wear retail market of
casual clothing and therefore is a direct competitor of A&F
Financial
diagnosis
A&F
2012
10

11. Macroeconomic trends
• The
global
economic
downturn
had
a
profound
effect
on
consumer
spending
habits
(consump?on
goods):
– In
the
developed
world
in
par&cular,
job
losses,
economic
uncertainty
and
the
implementa&on
of
public
austerity
measures
con&nue
to
dampen
consumer
confidence
– Increase
of
“saving
money”
was
seen
in
Brazil
(39%),
India
(38%)
and
the
US
(36%);
while
the
UK
had
the
largest
share
of
respondents
who
had
increased
visits
to
discount
stores
– However,
consumers
are
not
prepared
to
compromise
on
quality
=>
Value
for
money
is
the
key
goal
of
most
shoppers
Financial
diagnosis
A&F
2012
11

12. Legal constraints
• Labeling of textile industry products all around the world
• Ex: current regulations of the European Communities by which
labelling of textile products relates to the material composition and
regulates:
– the details required in labelling textile products with information on the composition of the material used,
– an overview of the names of individual types of textile fibres and a description thereof,
– contractual mark—ups used for calculation of the mass of fibres contained in textile products,
– a list of textile products not subject to labelling or marking as regards textile fibre content,
– a list of products for which only inclusive labelling or marking is obligatory.
• Protection of trademarks, drawings and models in Asia
• Controls of textile products toxicity and clothing in the EU
• Guide of the EU preferential rules of origin (trade partnership quota)
=>
Global
legal
constraints
are
lead
by
the
WTO,
then
other
constraints
are
managed
locally
accor?ng
to
the
geographic
zone
Financial
diagnosis
A&F
2012
12

13. Innovation in the apparel industry:
well-being concept
• Which company?
– Goodnighties Recovery Sleepwear is made using a patented
ionization process, dubbed Ionx technology, which embeds
negative ions into the fabric fibres
• How does it work?
– Positive ions are associated with pollution and are thought to
cause headaches and depression
– On the contrary, negative ions are thought to have a positive
effect on health and wellbeing
=> Fabric innovation can influence trends in laundry care and
laundry appliances
Financial
diagnosis
A&F
2012
13

14. Innovation in the apparel industry:
environmental protection
• Which company?
– One of the most advanced new fabrics is a new eco-sustainable
yarn, r-Starlight, produced by a Swiss firm, Noyfil SA, in
conjunction with four other manufacturers
• How does it work?
– The fabric is made from post-consumer recycled pet bottles
– The resulting sportswear line boasts a small environmental
footprint as well as comfort, coolness, breathability,
colourfastness and thermoregulation
=> Fabric innovation can improve brand notoriety
Financial
diagnosis
A&F
2012
14

15. Seasonal cyclicity
• The retail apparel market has two principal selling seasons:
– the Spring season which includes the first and second fiscal
quarters
– the Fall season which includes the third and fourth fiscal
quarters
• As is typical in the apparel industry, the company experiences its
greatest sales activity during:
– the Fall season due to the Back-to-School (August)
– Holiday (November and December) selling periods
=> The annual selling activity is concentrated on three months:
August, November and December
Financial
diagnosis
A&F
2012
15

16. A&F
HISTORY
&
PRESENTATION
Financial
diagnosis
A&F
2012
16

17. Abercrombie & Fitch
• Founded in 1892 in New York City
• Bankrupt in 1976 and revived in 1997
• Sells « Casual Luxury » clothes focused on young consumers
• Gathers 4 brands :
– Abercrombie & Fitch
– Abercrombie Kids
– Hollister
– Gilly Hicks
• RUEHL brand was closed in 2009
• End of 2011: Has over 1045 stores worldwide
Financial
diagnosis
A&F
2012
17

18. Abercrombie & Fitch brands : The
American Luxury cool
• East coast traditions and Ivy league • Prestigious East coast prep schools
heritage • Vintage-inspired style for kids
• Privilege and casual luxury • Suited for 7-14 years
• Class and sexy, a bit provocative
• Suited for 18-22 years old
• Fantasy of Southern California • Cheeky cousin of Abercrombie & Fitch
• Young, spirited beach style • Australia-inspired Underwear and bras
• Suited for 14-18 years old • Suited for Women from 18 years old
Financial
diagnosis
A&F
2012
18

19. Abercrombie & Fitch :
US-concentrated sales
• Abercrombie & Fitch is focused on
the american market : 81% of sales Sales
• Famous brands with luxury cool
image in the US Other
Europe
6%
• Reputation still to build 13%
internationnally
• Highly profitable segment (12,6%
operating margin in 2010)
• Highly volatile segment due to
advertising and opertating costs
(1,8% operating margin in 2011) United
• Depends on american States
consumption and macroeconomics 81%
• Selling operated by the 1045
stores and Internet (12% of total
sales)
Financial
diagnosis
A&F
2012
19

20. Stores distribution : US closings
and worldwide expansion
US
Stores
Interna?onal
Stores
1200
120
1000
100
Gilly
Hicks
800
80
Hollister
600
60
abercrombie
Kids
400
40
A&F
200
20
0
0
January
2011
January
2012
January
2011
January
2012
• 946 out 1045 stores located in the US as of January 29, 2012
• 71 stores were closed in the US in 2011, 50% of which concerned the A&F brand
• International expansion started in 2006 after maximum growth was reached in the US
• 47 new stores were opened outside the US, 39 of which concerned the Hollister brand.
• The international stores were mainly opened in Germany, Spain and France.
Financial
diagnosis
A&F
2012
20

21. Strategy
• Targeting :
– Target cool and attractive people
– Target fashion-conscious consumers with age ranging from elementary
school to post-college served by their four brands
• Positionning :
– Inspirational brand of college, cool, with high quality products
– Cater a very niche market
– Near luxury brand – casual luxury : brands target customers from the
middle and upper-middle class who desire to wear the latest fashions,
but can not afford to pay premium, luxury prices
Financial
diagnosis
A&F
2012
21

22. Mix Marketing Analysis (1/2)
• Promotion :
– The Abercrombie & Fitch person (through cutting or shape of clothes).
Target age, being young adult, models in the catalogs, magazines, website,
and store posters appear to be in their early twenties
– Uniqueness (through design & logos)
– Luxury (through the store concept and advertising)
– Exclusivity (through membership and promotional event)
• Place :
– Company views the customer's in-store experience as the primary vehicle
for communicating the spirit of each of the brands
– company uses the visual presentation of the merchandise, the in-store
marketing, music, fragrances and the sales associates, or brand
representatives
– effort to reinforce the inspirational lifestyles represented by thebrands, the
youthfulness and the sensuality which they endorse
Financial
diagnosis
A&F
2012
22

23. Mix Marketing Analysis (2/2)
• Price :
– sell the products at premium price without necessity for regular
discounts
– categorize their price range with respect to the product line and the
market segment
• Product :
– products
sold
by
Abercrombie
&
Fitch
send
messages
of
fency
and
high
quality
clothes
as
well
as
“casual
luxe”
– the
use
of
word
logos
like
A&F
tended
to
be
on
the
more
relaxed
clothing
such
as
t-­‐shirts,
sweatpants,
and
sweatshirts
– the
moose
symbol
is
on
more
high
quality
clothing
such
as
bufon
up
shirts
and
cashmere
sweaters.
– products
shaped
to
spread
the
message
of
thinness,
in
large
sizes
Financial
diagnosis
A&F
2012
23

24. ORGANIZATION
&
CAPITAL
STRUCTURE
Financial
diagnosis
A&F
2012
24

25. Organization & Capital Structure 2010
Total Debt/EBITDA 0.1x
Total Senior Debt/EBITDA 0.1x
Total Debt/(EBITDA-CAPEX) 0.2x
Total Senior Debt/(EBITDA-CAPEX) 0.2x
Total Senior Secured/(EBITDA-CAPEX) 0.1x
50.3
Total Debt
3.5%
1,387
Total Common Equity
96.5%
1,437.3
Total Capital
100%
Financial
diagnosis
A&F
2012
25

26. SWOT
&
OTHER
ANALYSIS
TOOLS
Financial
diagnosis
A&F
2012
26

27. SWOT Analysis (1/2)
• Strengths:
– Brand Image
– Senses experience in stores (sight, taste, sound, smell, touch)
– Flag Ship Stores in new countries
– Strong financial performance
– Robust balance sheet (see financial analysis)
• Weaknesses:
– Costs of structure
– Low inventory turnover ratio (40 days average)
– They seem to stigmatize an important part of the population by creating
their specific universe
– The exclusivity created by the brand alienates some groups
Financial
diagnosis
A&F
2012
27

28. SWOT Analysis (2/2)
• Opportunities :
– Expand Internationnaly outside US
– Sucess of the french store on the Champs Elysées
– Expend products / services line
– Develop even more on-line shopping experience
• Threats :
– Striving for a certain look and style
– Limiting the types of clientele that frequent the stores, it limits the
potential income that the company could be earning
– Economic slowdown (cyclical economic changes)
– Rising cost of materials, commodity prices
– Counterfeit goods
Financial
diagnosis
A&F
2012
28

29. The five-forces model of competition (1/2)
• Barriers to entry :
– relatively low as the cost to purchase and produce apparel is minimal
– economies of scale provide a significant advantage over the local stores
– low growth in this industry also makes it less attractive to new entrants
• Competition :
– moderate to high
– forces each company to reinvent itself to maintain efficiency and
inventory control
– strong rivalry when firms are unable to differentiate their products in the
industry
• Direct substitute :
– difficulty due to brand identification
– once the name brand has been removed, one article of clothing
becomes difficult to tell apart from a similarly looking article of clothing
Financial
diagnosis
A&F
2012
29

30. The five-forces model of competition (2/2)
• Suppliers :
– little power due to the fact that the company buys merchandise from
numerous factories and suppliers around the globe (in 27 countries)
• Buyers :
– willing to pay a premium price for perceived quality and “fashion
recognition”
– pricing points tend to be very elastic
– buyers hold minimal power over their suppliers because of the
fragmentation of the retail industry
Financial
diagnosis
A&F
2012
30

31. Potential causes of changes in industry
and competitive conditions (1/2)
• Globalization :
– moving from regional focus to international focus
– globalization is a strong driver to broaden its current market share
• Emerging new Internet capabilities and applications :
– gives buyers extraordinary ability to explore the product offerings from
any brands and any shop of the market for the best value (11.7% of net
sales)
• Product innovation :
– wider product differentiation to attract more first-time buyers
• Marketing innovation :
– controversy advertising such as publishing a provocative catalog
photograph, revealing clothes can alter the competitive positions of rival
firm and effectively attract attention of teenager and young adult who
often respond positively to this kind of marketing strategy
Financial
diagnosis
A&F
2012
31

32. Potential causes of changes in industry
and competitive conditions (2/2)
• Changing social concerns, attitudes and lifestyles :
– rising
social
issues
and
changing
ahtudes
and
lifestyles
can
be
dominant
to
lead
the
industry
change
– people
purchase
the
product
not
just
for
the
func&onality
but
because
it
promotes
a
certain
value
that
they
can
relate
to
Financial
diagnosis
A&F
2012
32

33. FINANCIAL
ANALYSIS
Financial
diagnosis
A&F
2012
33

34. Financial
analysis:
ra&os
&
cash-­‐flows
• Balance
sheet
and
income
statement
changes
• Liquidity
analysis
• Profitability
analysis
• Solvency
analysis
• Peers
Mul&ple
Method
• Transac&ons
mul&ple
method
• DCF
valua&on
Financial
diagnosis
A&F
2012
34

35. Balance
sheet
and
income
statement
changes
Jan-­‐2009
Jan-­‐2010
Jan-­‐2011
Jan-­‐2009
Jan-­‐2010
Jan-­‐2011
%
of
total
BS
%
of
total
Revenue
ASSET
Total
Cash
&
ST
Investments
Income
Statement
18%
25%
28%
Gross
Profit
Total
Receivables
67%
64%
64%
2%
3%
3%
Other
Opera?ng
Exp.,
Total
Current
Assets
(Cash Total
+Receivables+Inventory+DTx)
53%
59%
56%
38%
43%
18%
Opera?ng
Income
Net
Property,
Plant
&
Equipment
14%
5%
8%
49%
44%
39%
Net
Interest
Exp.
LIABILITIES
0.3%
0.1%
-­‐0.1%
Total
Current
Liabili?es
EBT
Excl.
Unusual
Items
16%
16%
19%
15%
5%
8%
Total
Liabili?es
(current
EBT
Incl.
Unusual
Items
liabili?es+LTDebt+Dtx+Non-­‐ 15%
4%
7%
Recurrent
liabili?es)
35%
35%
17%
Earnings
from
Cont.
Ops.
Total
Common
Equity
9%
3%
4%
65%
65%
64%
Net
Income
to
Company
Total
Equity
8%
0%
4%
65%
65%
64%
Net
Income
8%
0%
4%
• The
Balance
Sheet
is
quite
steady
even
if
Abercrombie
&
Fitch
has
started
to
invest
more
in
its
inventory
while
dives&ng
from
its
net
property
• This
is
consistent
with
its
strategy
aiming
at
being
able
to
face
a
huge
growth
in
demand
Financial
diagnosis
A&F
2012
35

36. Liquidity
analysis
Liquidity ratio Jan-09 Jan-10 Jan-11
Inventory Turnover (days)
40.70 39.68 42.36
Current ratio
1.10 0.96 0.95
DSO (days)
5.20 10.57 7.35
DPO (days)
27.46 48.96 37.25
• Stable
inventory
turnover
of
40
days
which
remains
constant
• In
2009,
A&F
had
a
posi&ve
current
ra&o
that
shows
its
ability
to
face
its
short
term
liabili&es
but
from
2010
the
current
ra&o
is
nega&ve
thus
showing
an
issue
in
the
management.
The
growing
opera&ng
expenses
allow
us
to
draw
the
same
conclusion
as
far
as
A&F
opera&ng
management
is
concerned
• As
A&F’s
business
is
based
on
retail
store
selling
the
company
as
small
DSO.
Most
of
the
&me,
customers
pay
directly
when
buying
from
the
store
• The
increasing
DPO
shows
that
A&F
is
pressuring
suppliers
by
paying
later
than
before.
This
can
be
explained
by
its
increasing
bargain
power
consistent
with
its
growing
success
Financial
diagnosis
A&F
2012
36

37. Profitability
analysis
Profitability ratio Jan-09 Jan-10 Jan-11
Gross margin
33.09% 35.68% 36.23%
Operating margin
14.35% 4.85% 8.08%
Net margin
7.81% 0.01% 4.33%
ROE
14.69% 0.01% 7.91%
ROA
9.52% 0.01% 5.09%
ROCE
15.26% 0.02% 9.88%
• The
gross
margin
has
improved
a
lifle
bit
but
the
opera&ng
margin
shows
some
weakness
in
opera&ng
management
but
can
be
explained
by
different
factors:
the
development
of
new
brand
concept
such
as
Gilly
Hicks,
store
closure
and
lower
net
gains
from
foreign
currency
denominated
transac&ons.
Nevertheless,
the
management
seems
to
have
iden&fied
some
factors
to
achieve
a
improvement
of
opera&ng
margin
• The
net
margin
has
undergone
a
huge
drop
in
2010
and
a
lifle
recovery
in
2011
due
to
the
overall
cost
increasing
• The
ROE
has
dropped
in
2010
because
of
the
net
margin
drop
• The
ROA
has
dropped
in
2010
the
net
income
drop
Financial
diagnosis
A&F
2012
37

38. Solvency
analysis
Solvency ratio Jan-09 Jan-10 Jan-11
Debt to equity
29.95% 29.79% 26.35%
LT Debt to equity
5.42% 3.90% 3.63%
EBIT/Interest Expenses
147 22 36
EBITDA/Interest Expenses
147 22 36
• The
debt
to
equity
ra&o
is
stable
un&l
2010
and
decrease
in
2011
due
to
a
deleveraging
in
order
to
be
more
comfortable
with
their
credit
agreement
covenants
•
The
LT
debt
to
equity
decreasing
shows
that
A&F
rely
less
in
LT
financing
• EBIT
and
EBITDA
to
interest
expenses
are
greater
than
way
greater
than
1
which
shows
the
great
ability
of
A&F
to
cover
its
interest
payments
Financial
diagnosis
A&F
2012
38

39. Peers
mul&ple
method
• Our sample is composed of contemporary brand, missy brands and teen brand as
A&F represents all these styles
EV 2,802
• The multiple EV/Ebitda seems to be the most accurate multiple as our company is -­‐Debt
Net 57.9
an apparel retailer +Cash
&
Cash
equivalent 668.1
-­‐prefered
equity 0
• We obtain an EV of 2,802 billions US dollars using and EV/Ebitda multiple of 5,5. -­‐total
minority
interest 0
Market
Capitalization 3,412
• The Equity value deducted from this EV is of 3,412 billions US dollars
Financial
diagnosis
A&F
2012
39

40. Transac&ons
mul&ple
method
EV Sales EV/
Date Target Acquiror %
(M€) (M€) Sales EBITDA EBIT PER
02/12 Billabong TPG Capital 76% 1 114 1 329 0,84x 6,9x 8,6x 7,4x
02/12 Benneton Edizione Holding 95% 1 612 2 032 0,79x 6,7x 10,5x 11,8x
12/11 Wave International Tokyo Style 100% 12 41 0,30x n.a 7,4x 27,9x
Median 0,79x 6,78x 8,60x 11,79x
Mean 0,64x 6,78x 8,81x 15,69x
Sources : mergermarket
• Because similar transactions with figures are rare, we have selected three recent
operations which can benchmark the value of our transaction.
EV 3,485
• The multiple of EV/EBITDA is 6,78 and therefore the enterprise value is of 3,455 -­‐Debt
Net 57,9
billions US dollars. +Cash
&
Cash
equivalent 668,1
-­‐prefered
equity 0
• The equity value is 4,095 billions US dollars. -­‐total
minority
interest 0
Market
Capitalization 4,095
Financial
diagnosis
A&F
2012
40

41. DCF
valua&on
Assump&ons
for
DCF
simula&on:
• Analysts’
consensus
on
the
business
plan
from
2012
to
2016
• 32%
tax
rate
for
the
US
• 1.5%
growth
prior
to
final
year
for
terminal
value
calcula&on
• WACC
:
13.1%
from
capital
structure
DCF
valua?on
WACC
in
$
millions
2012e
2013e
2014e
2015e
2016e
rf
3.23%
E(rm)-­‐rf
5.00%
EBITDA
540.54
746.29
861.73
1,009.97
1,051.95
Bu
1.97
Pie
Ebit
307.58
486.77
618.4
756.82
897.00
WACC
13.1%
Capex
241.80
378.89
369.7
365.23
317.74
Delta
BFR
51.01
58.92
65.96
72.64
76.40
Valeur
Terminale
FCF
149.30
308.48
426.07
572.10
657.81
g
1.5%
Coefficient
d'actualisa?on
1.13
1.28
1.45
1.64
1.85
VT
5766
FCF
actualisé
132.03
241.24
294.66
349.89
355.77
Tax
rate
32%
Somme
FCF
actualisés
1,373.60
Financial
diagnosis
A&F
2012
41

42. DCF
valua&on
Assump&ons
for
DCF
simula&on:
Entreprise Value 17117
• Analysts
consensus
on
the
business
plan
from
2012
to
2016
• 32%
tax
rate
Market cap 4331
• 1.5%
growth
prior
to
final
year
for
terminal
value
calcula&on
Net Debt -463
• WACC
:
13.1%
Market EV 4794
A&F
(&cker:
ANF)
04/17/2012:
$
48.42
=>
total
market
cap:
$
4.100
bn
Peers
mul&ple
method:
$
3.412
bn
Transac&ons
mul&ple
method:
$
4.095
bn
Average
=
$
4.100
bn
DCF
method:
$
4.794
bn
Median
=
$
4.103bn
•
Our
valua&on
shows
that
Abercrombie
&
Fitch
is
well
valued
by
the
market
•
Indeed,
the
market
is
s&ll
quite
vola&le
(S&P500
+1.55%)
because
of
the
fear
among
investors
concerning
the
US
recovery
and
the
apparel
industry
suffers
from
its
intrinsic
vola&lity
(ANF
+3.51%)
Financial
diagnosis
A&F
2012
42

43. ANF
quotes
and
volumes
from
IPO
(August
1996)
Financial
diagnosis
A&F
2012
43

44. CONCLUSION
• A&F
seems
well
valued
to
us
according
to
valua&on
methods
employed
• Strong
and
stable
balance
sheet
(Equity=65%BS)
=>
weak
gearing
ra&o
• Posi&ve
perspec&ves
(strong
brand
image
+
new
markets
opportuni&es
in
Asia)
=>
Buy
Financial
diagnosis
A&F
2012
44