How important are the Ecommerce Sales to Abercrombie’s Stock Price?
Ashit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Abercrombie & Fitch’s (NYSE: ANF) direct to consumer business primarily comprises of the ecommerce channel. The direct to consumer business incurred significant losses during 2008/09, as the macroeconomic environment was highly unfavourable for premium retailers. Nevertheless, last two years have witnessed a strong growth in the e-commerce channel, as the total revenue from the ecommerce channel grew to $700 million during 2012. The direct to consumer business has reported a YOY growth rate of 27% since 2007.
Abercrombie’s ingress into mobile commerce and the launch of its ecommerce site in Europe were other key contributing factors to the growth in top line during 2012.
The global revenue from direct to consumer business grew from $410 million during 2010 to $700 million by 2012. Given, the online apparel market is estimated to grow exponentially in US during the next few years, the online revenues of Abercrombie &Fitch are expected to surpass $1.5 billion.
This makes the ecommerce platform of Abercrombie & Fitch a significant contributor to the overall revenues, and a pertinent revenue stream that will underpin its future growth.
Estimating the Growth in Online Apparel Market
With growing popularity of smart phones and tablets the internet penetration is also rapidly increasing. According to the latest research published by Forrester, the online retail sales in US this year should report a 12% increase from 2012. Furthermore, by 2017 the total estimated size of the US online market should reach $370 billion from $262 billion. This gives us a 9% CAGR from 2014 to 2017.
Assuming a slight fall of 2% to 3% in the growth rate after 2017, the total market size will still increase to $420 billion (assuming a growth rate of 6.5% from 2017) by 2019. The size of online retail market in US stood at $176 billion by the end of 2010. Therefore, it can be concluded that the US online retail market should report a CAGR of 10% between 2010 and 2019.
Traditionally, the online apparel retail market has reported a faster growth rate relative to the overall online retail market. It must be noted, from 2004 to 2009 the total online retail sales in US reported a growth rate of 16%, and in contrast, the online apparel sales grew by 19%. Given, the online apparel market size stood at $2.9 billion during 2009, and assuming the online apparel market continues to grow at a faster rate than the overall online retail market (assuming 12% growth rate). In that case, the size of online apparel market should reach $9 billion by the end of 2019.
Abercrombie &Fitch reported the online apparel market share of 15% during 2011, assuming the growth in the online retail sales slightly slows down and the market share only manages to reach 17% by 2019. Then, the total US online sales for Abercrombie & Fitch should stand at $1.53 billion by 2019 as per my estimates.
Efforts to Bolster M-commerce Sales
During 2010, Abercrombie & Fitch entered the mobile commerce channel, facilitated by Digby’s platform, which made its website available on internet enabled mobile phones. This allowed its customers to purchase from its website using only there mobile devices. In addition, it also launched an all new iPad application to promote its ecommerce site.
The mobile commerce sales is now an integral part of the US ecommerce business, as the sales from mobile commerce accounted for roughly 3% of the total ecommerce sales in US during 2012.
Going forward, the contribution from mobile commerce is estimated to reach 9%, thus, Abercrombie & Fitch’s efforts to develop a stronger mobile commerce channel will prove crucial to its earnings.
The growth in online retailing and the efforts made by Abercrombie & Fitch should bolster its sales in the future, nevertheless, increasing competition from retailers such as Urban Outfitters (NASDAQ: URBN) and American Eagle Outfitters (NYSE: AEO) will not make life any easier.
Urban Outfitters generates a large percentage of its revenue through internet and catalogue orders. Presently, the ecommerce sales account for 23% of the total revenues, which makes it the second largest revenue stream after its retail stores. During fiscal 2012, the company operated on an EBITDA margin of approximately 24%, in contrast, internet and catalogue orders operate on an EBITDA margin of 36%. This largely underpins the importance of ecommerce sales for apparel retailers.
Urban Outfitters has a market cap of $5.8 billion and its current share price is trading at around 91% of its 52-week high. According to the valuation offered by Trefis, the FCF-EBITDA is expected at around 46% during 2013.
American Eagle Outfitters generates 80% of its revenues through self owned stores. The internet and catalogue orders contribute 13% to the top line. During fiscal 2012, the company operated on an EBITDA margin of 26%, in contrast, the internet and catalogue orders operated on an EBITDA margin of 40%. According to the valuation offered by Trefis, the FCF-EBITDA is expected at around 66% during 2013.
American Eagle Outfitters has a market cap of $3.7 billion and the current share price trades at around 81% of its 52-week high. The internet and catalogue orders operate on relatively much higher margins, and going forward, I expect all apparel retailers in US to make special efforts to bolster the ecommerce channel.
Importance of the Online Sales
At present the global revenue from the online channel for Abercrombie & Fitch stands at $700 million. My current forecast suggests Abercrombie & Fitch’s online sales in US will surpass $1.5 billion by 2019.
However, it must be noted it also possesses ecommerce presence in Europe, and consider a scenario where the macro economic conditions improve and the international growth accelerates, then the total online sales could exceed $2.0 billion by the end of 2019.
With the right product mix and marketing strategy for the ecommerce platform, Abercrombie & Fitch can attain a strong upside to its share price. The operating margins in the ecommerce division are relatively higher, and going forward, online sales of all apparel retailers will define success or failure for the season.
Ashit Gulati has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!