Abercrombie & Fitch Co. (ANF): This Teen Retailer Is a Good Bet

Abercrombie & Fitch Co. (NYSE:ANF)Abercrombie & Fitch Co. (NYSE:ANF)‘s stock price has increased by 38% in the last one year period but the last six months were not accelerating enough. It has reported negative same store sales, or SSS, in the first quarter, which was largely attributed to inventory shrinkage that has been taken care of now. The company has taken cross-functional initiatives to improve its operating process this year and is also looking for better margin levels. Here’s a look at these initiatives in detail.

Cross-functional initiatives for profit expansion will increase margins

Abercrombie & Fitch Co. (NYSE:ANF) has taken cross-functional initiatives to improve its operating performance. It has divided its initiatives across seven work streams of the business. General non-merchandising expense and marketing work streams will lead to 30% of total expenses for it. The company has identified a $35-$55 million annual savings opportunity in the next 6 to 12 months during the implementation period of this initiative.

It is working on store operations, home office and supply chain work streams for savings opportunities, which are under the validating phase. It also completed its first market research and study in the first quarter, which will help it to explore sales and margin.

International store expansion and direct-to-consumer will drive sales growth

International store sales including direct-to-consumer, or DTC, increased by 10% in the first quarter, and they have contributed around 46% to the total company sales. Abercrombie & Fitch Co. (NYSE:ANF)’s international stores are more profitable and providing higher return than its US stores.

China reported comps growth of 40% in the first quarter, and the company will look for more new stores in the Asia region. The company will open its first stores in Seoul and Shanghai this year and increase 20 international Hollister chain stores in this fiscal year.

DTC business is a high margin business, with 42% operating margin level in the first quarter. Abercrombie & Fitch Co. (NYSE:ANF) has upgraded its order management system and increased the online exclusive products. Its international stores expansion and DTC will drive sales growth in the long term.

Share repurchases and increased dividend signals management’s confidence on the stock

The company repurchased 350,000 shares in the first quarter worth $16.3 million. Abercrombie & Fitch Co. (NYSE:ANF) currently has $18.4 million in share repurchases available under board approval. It will look to continue the share purchase activity as margin expansion trends are visible.

It has increased its dividend to $0.20 per share from $0.175 per share of same period last year. Abercrombie & Fitch Co. (NYSE:ANF)’s continuous share repurchases strategy and increased dividend is positive signs for investors.

Peer analysis

In the fashion specialty retail segment of the retail industry, the other two major players are American Eagle Outfitters (NYSE:AEO) and Aeropostale Inc (NYSE:ARO).

American Eagle Outfitters (NYSE:AEO) has taken strong initiatives to increase its online sales and invested in the omni-channel network. Its Aerie Brand has better online mix than overall company mix and has. It reported 4% comps in the first quarter.