Abercrombie & Fitch (ANF) could die this holiday season because it is heavily exposed to Amazon (NASDAQ: AMZN).
To explain, Morgan Stanley analysts expect Amazon to become America’s top clothing retailer by the end of 2018, CNBC observes. Importantly, most of Amazon’s apparel sales growth is driven by younger shoppers ditching brick and mortar and casual clothes sales.
Specifically, Amazon’s best-selling clothes are casual items like pants and t-shirts. Hence, Amazon has become Abercrombie & Fitch’s (NYSE: ANF) biggest direct competitor. Additionally, clothing labels like Calvin Klein are using Amazon’s platform to sell directly to the public.
Abercrombie & Fitch (ANF) could die because Amazon could be America’s top clothing retailer
Walmart NYSE: WMT) was America’s top apparel retailer in 2017 with 8.6% of the market.
Meanwhile, Amazon was number two with 7.9%, Morgan Stanley estimates. On the other hand, Abercrombie & Fitch (ANF) had a 0.8% share of America’s clothing market.
The situation is not that bleak for Abercrombie & Fitch because of the clothing market’s decentralized nature. To clarify, there is more than enough market share for Abercrombie & Fitch (ANF) to survive.
In fact, no company had more than a 9% share of the U.S. apparel market in 2017. Hence, there is room for smaller brands like Abercrombie & Fitch to survive.
Is the Retail Apocalypse a Threat or an Opportunity at Abercrombie & Fitch (ANF)?
There are some interesting opportunities in front of Abercrombie & Fitch (ANF). For instance, the bankrupt Sears Holdings (OTC: SHLD) is likely to go out of business in 2019.
Interestingly, Sears has 1% of the US apparel market which Abercrombie & Fitch could absorb. Moreover, companies like JC Penney (NYSE: JCP), Kohl’s (NYSE: KSS), and Macy’s (NYSE: M) are likely to close stores in 2019. Abercrombie & Fitch could take advantage of that.
Beyond ailing competitors, the retail apocalypse is creating some interesting opportunities for Abercrombie & Fitch (ANF). Thus, Abercrombie could grow as much of the traditional retail industry collapses.
How Abercrombie & Fitch (ANF) could grow amidst the retail apocalypse
Interestingly, there are several intriguing growth opportunities for Abercrombie & Fitch amidst the retail apocalypse.
The most interesting opportunity is to open smaller or pop-up Abercrombie & Fitch stores inside other retailers. Abercrombie & Fitch inside a Nordstrom (NYSE: JWN) department store, Macy’s, or a Kroger (NYSE: KR) Marketplace supercenter for example.
A related opportunity could be combination stores with Best Buy (NYSE: BBY), Aldi, or Barnes & Noble (NYSE: BKS). A far more lucrative opportunity is an alliance between Abercrombie and Amazon.
Abercrombie & Fitch could open in Whole Foods Markets; or Amazon bookstores, for instance. In addition, there could be a store combining an Amazon Go no-cashier convenience store and Abercrombie & Fitch. Since Amazon reportedly plans to open 3,000 Go locations, there could be a lot of room for expansion.
How Amazon Prime and Instacart could help Abercrombie & Fitch (ANF) grow
Finally, Abercrombie & Fitch (ANF) could double down on its e-commerce efforts. A major opportunity online is Amazon Prime, which can expand Abercrombie’s footprint to every front porch in America.
Notably, Amazon Prime had 95 million subscribers in June 2018 up from 85 million in June 2017, Statista calculates. Thus, Amazon Prime is the fastest growing and most important retail outlet in America.
Additionally, Abercrombie could harness other retail distribution systems like the one Instacart is building. For example, TechCrunch claims, Instacart delivery of Kroger groceries will reach over 1,600 supermarkets and 70% of America’s population by 2019.
An interesting opportunity for Abercrombie & Fitch is the 20 robotic customer fulfillment centers Kroger and Britain’s Ocado Group PLC (LSE: OCDO) plan to build across America. The CFCs could be an opportunity for Abercrombie & Fitch because they will use robots to pack delivery orders.
Specifically, the robots could pack Abercrombie & Fitch clothes along with groceries. Hence, Kroger and Ocado could provide brands like Abercrombie an alternative to Amazon.
Is Abercrombie & Fitch (ANF) making money?
Abercrombie & Fitch (NYSE: ANF) needs some new marketing and distribution channels because it is not making much money.
For instance, Abercrombie & Fitch reports a gross profit of $527.82 million on $861.19 million in revenues for 4th Quarter 2018. In addition, Abercrombie & Fitch had an operating income of just $39.68 million and a net income of $23.92 million for 4th Quarter 2018.
To make things worse, Abercrombie & Fitch’s revenues grew at a rate of 0.24% in 4th Quarter 2018. Hence, Abercrombie & Fitch’s resources are extremely limited. In particular, Abercrombie & Fitch had an operating cash flow of $26.72 million and a “free cash flow” of -$17.93 million on November 3, 2018.
Abercrombie & Fitch (ANF) is closer to the death spiral than you think
Thus Abercrombie & Fitch is just one bad quarter away from the death spiral. To explain, the death spiral occurs when a retailer runs out of cash and needs to borrow or sell assets to survive.
Correspondingly, Abercrombie & Fitch had $520.52 million in cash and equivalents on 3 November 2018. Hence, Abercrombie & Fitch does not have enough money in the bank to cover operations costs for a quarter. Importantly, Abercrombie & Fitch’s total liabilities of $590.71 million exceeded its cash at the end of 3rd Quarter 2018.
Nor is it in a position to borrow that much money using its assets. For instance, Abercrombie & Fitch reported total current assets of $1.29 billion and total assets of $2.882 billion on 3 November 2018.
On the other hand, Abercrombie & Fitch has slightly increased its resources in 2018. Notably, the company reduced the number of store closings planned for 2018 from 60 to 40, Fortune reports. Thus, Abercrombie & Fitch is able to fend off the death spiral with a slight sales increase.
For the record Abercrombie’s digital sales grew by 16% and its comparable sales grew by 3% during 3rd Quarter 2018. Under those circumstances, a wiser strategy for Abercrombie could be to close more stores and invest the money saved in digital.
Is Abercrombie & Fitch (ANF) a Value Investment?
The growth numbers will have many people wondering if Abercrombie & Fitch is a value investment. In fact, ANF shares were cheap at $19.39 on 28 December 2018.
Plus, Abercrombie & Fitch (ANF) paid a dividend of 20¢ on 17 December 2018. However, that dividend has not grown for a long time. In fact, Abercrombie & Fitch paid a 20¢ dividend back on 3 June 2013.
The overall dividend data for Abercrombie & Fitch was good on 28 December 2018. In detail, ANF shareholders enjoyed a dividend yield of 4.13%, an annualized payout of 80¢ and a payout ratio of 105.3% on that day.
Thus Abercrombie & Fitch (ANF) is worth investigating if you want a cheap retail stock that pays a decent dividend. However, I think Abercrombie & Fitch is doomed without creative management that can move the brand beyond traditional brick and mortar.
This story first appeared at Market Mad House a front row seat for the great retail apocalypse.