Does an American Eagle Outfitters bid for Abercrombie & Fitch add up?

Discussion
A&F's Columbus, Ohio prototype - Photo: Abercrombie & Fitch
May 26, 2017
George Anderson

American Eagle Outfitters and the private equity firm Cerberus Capital Management are working on a joint bid to acquire Abercrombie & Fitch (A&F), according to a Wall Street Journal report. News of the expected bid drove A&F’s share price up 10 percent in trading yesterday.

A bid from the parties, which is likely to be rivaled by separate offers from other investment firms and the Express Inc. clothing chain, could be approved or rejected within the month, according to unnamed sources familiar with process who spoke with the paper.

What’s not known at this point is how a deal between American Eagle and Cerberus would be structured.

American Eagle reported a two-percent gain in same-store sales across its portfolio during the first quarter, down from the six percent jump it recorded during the same period in 2016. The teen clothing retailer greatly benefited from a 25 percent increase in same-store sales from its Aerie lingerie business.

Gross profits fell as American Eagle increased promotions and absorbed shipping costs associated with a shift to more online sales.

American Eagle CEO Jay Schottenstein told analysts that the company posted “record volumes in e-commerce” during the first quarter. Online sales accounted for 26 percent of the company’s total revenue in the period, up from 19 percent last year.

“Effective digital marketing and increases in mobile contributed to the growth, investments and a more seamless and positive online shopping experience across digital channels also drove sales,” said Mr. Schottenstein (via Seeking Alpha).

A&F, which has seen sales decline for four years, posted a decrease in same-store sales of 3 percent during the first quarter. The decrease, from Wall Street’s perspective, was mildly encouraging as analysts were expecting a drop of 3.4 percent. It also marks an improvement over the 13 percent decline in comp sales the company reported for the fourth quarter. Same-store sales for the company’s Hollister brand, a bright spot for A&F, increased 3 percent in the first quarter.

DISCUSSION QUESTIONS: What do you think American Eagle Outfitters would look to do if it acquired Abercrombie & Fitch in a joint deal with Cerberus Capital Management? What do you see as the challenges and opportunities that come with an A&F acquisition?

Braintrust
"A focus on quality and small-batch original clothing would get Abercrombie out of the red. "
"From what I can see, AEO has more of a digital strategy with these brands. Which I believe makes sense over the long term. "
" It is a positive pruning for a sector when growth by M&A is based on gaining economies of scale or by profits from split-up/sell-off. "

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14 Comments on "Does an American Eagle Outfitters bid for Abercrombie & Fitch add up?"

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Mark Ryski
BrainTrust

American Eagle has delivered reasonable results in a difficult environment so I understand how they might believe they have the right approach to turning around Abercrombie & Fitch. However, as we all know, fashion is fickle and the apparel category is being steamrolled by fast fashion juggernauts H&M and Zara. A&F is in a difficult spot. Once a brand falls out of favor it’s very difficult to bring it back. I would suggest all potential suitors proceed very cautiously on this front.

Bob Phibbs
BrainTrust

If e-commerce is up so much, why do they need all the Abercrombie & Fitch stores? Even the Sears/Kmart deal made more sense for having known brands. Banking on more teen retailer turnaround sounds awfully optimistic.

Frank Riso
BrainTrust

This may not be the best move for American Eagle Outfitters since they are also not on very firm ground. It could bring them down as well. The only way it might work is to reduce A&F’s costs by closing its headquarters and doing all buying at one location for the entire company. There is just too much cost involved in an A&F acquisition and that is a great risk. I do not see this happening.

Lyle Bunn (Ph.D. Hon)
BrainTrust

Economies of operation and selecting/amplifying best practices along with increasing locations that sell to similar demographics all make sense for category success. The core questions are a.) how will shopping behaviors change in terms of traffic and conversion by the targeted consumer? and b.) can the enterprise impact these in cost effective ways? The answer to question a is uncertain and the answer to question b can help answer question a.

Cathy Hotka
BrainTrust

I’ll agree with Mark that the odds are long, and would add that capital investment firms are becoming expert at bleeding retail companies dry. Prospects are thumbs-down on this one.

Phil Masiello
BrainTrust

From what I can see, AEO has more of a digital strategy with these brands. Which I believe makes sense over the long term. Cerberus generally gets involved for the real estate portion.

Abercrombie & Fitch and Hollister still have strong brand equity. The mall placements of stores is the issue. Mall traffic is down and I don’t see a recovery. AEO, therefore, acquires two additional brands.

The challenges are the financial specifics of the deal and the real estate commitments in the malls. Certainly having multiple brands provides AEO with more negotiating leverage with mall landlords.

Jasmine Glasheen
Staff

I’m still hoping for Abercrombie to come out with a hipster-savvy subsidiary like J.Crew’s Madewell. Since the brand is known for quality among Millennials, they’re not going to be able to integrate themselves into the fast fashion crowd. They also don’t have a great chance with Gen Z, since Gen Z doesn’t remember Abercrombie’s heyday. A focus on quality, makers and small-batch original clothing would get Abercrombie out of the red.

As far as the acquisition is concerned, it would take a rebranding initiative for either brand to become successful.

Art Suriano
BrainTrust
It is interesting to see today how rather than growing a business by investing in improvements and strategic expansion, companies just buy another competitor. This has become the new normal. American Eagle is far from figuring out the “new” successful model for specialty apparel, and Abercrombie & Fitch is even further away. We have too many specialty apparel chains all suffering from extreme “sameness.” These retail chains are suffering from weak comp store sales, e-commerce competition, declining store traffic and Millennials with a different buying lifestyle. So what purpose could it serve for American Eagle to buy Abercrombie & Fitch? Express is even worse off with dismal comp store sales the last few quarters. I don’t want to see Abercrombie & Fitch go out of business, but pairing them with a competitor who has enough of their own problems will only make it worse. Lastly, how many more retailers do we need to see being acquired by a private equity firm who loads them up with so much debt it makes it nearly impossible for… Read more »
Lyle Bunn (Ph.D. Hon)
BrainTrust

It is a positive pruning for a sector when growth by M&A is based on gaining economies of scale or by profits from split-up/sell-off. When available dollars are then invested in building the business everybody wins. The sad reality is that M&A too often enriches too few while not contributing to innovation or growth.

Art Suriano
BrainTrust

Originally that was the plan when private equity firms first bought retail companies; invest in them and grow them. Then it made sense to sell the business or take them public and make a profit. But too often today that’s not the case, which is a shame.

Brandon Rael
BrainTrust

Thankfully for American Eagle they have disrupted their organization, completed the critical pivots to attract a more digital-first, Millennial-minded, socially conscious shopper and have turned in some positive results. American Eagle has survived very tumultuous times in a teenage fashion industry that has been impacted by changing trends, the migration to fast fashion houses and the overall traffic in the malls.

However the risk and potential liabilities of acquiring another brand such as Abercrombie may be a bit higher than they can take on. Abercrombie would need some serious rebranding to better connect to Millennial and Generation Z consumers. They did not grow up with the brand and the loyal customers from 10 or 15 years ago have outgrown the target audience age range.

Ricardo Belmar
BrainTrust

This just feels like the same old strategy of fueling growth by adding more stores. Unless there’s a real synergy in cost structures, manufacturing, etc., I don’t see how this will help AEO. While they’re not under water like others in the apparel business, they’re not hitting it out of the park just yet either.

Buying a competitor who isn’t doing that well, doesn’t seem like a good growth strategy unless they’re considering things like closing A&F stores, or relocating AEO stores to better real estate. The presence of Cerberus Capital seems to imply there’s an interest in real estate or specific mall presence that they see value in. Whether this makes sense or not will depend on the final terms of the deal. Still seems like a risky transaction vs investing in new technology for their stores or in new product development or supply chain efficiency.

Craig Sundstrom
Guest

Ah yes, Cerebrus that great store….

This is a financial move that really has little to do with retailing. Whatever slight advantage AF might gain from being run by AEO — and that’s based on the generous assumption that (momentary) low single digit comps at the latter equate to genius — would be lost by the usual problems of debt and short-termitis.

The long term effect would likely be — if not the disappearance of the AF brand — a massive closing of what would now be seen as “duplicate” stores. Mall operators will wear out their knees praying this doesn’t go thru.

Stefan Weitz
BrainTrust

Here you’ve got two iconic brands for a particular segment of the market – I think growth and success can come from synergies that combine the tech and ops portions of the companies. A&F already has an impressive SFS program and other in-store technologies that could augment AE’s offering.

wpDiscuz
Braintrust
"A focus on quality and small-batch original clothing would get Abercrombie out of the red. "
"From what I can see, AEO has more of a digital strategy with these brands. Which I believe makes sense over the long term. "
" It is a positive pruning for a sector when growth by M&A is based on gaining economies of scale or by profits from split-up/sell-off. "

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