Declining Mall Traffic And Gen Z Trends Will Erode Margins

Key Takeaways

• Heavy dependence on physical stores and shrinking core demographics threaten long-term sales, margins, and overall revenue stability.
  
• Slow adaptation to sustainability trends and tough fast-fashion competition increase reputational and profitability risks.
  
• Diversified growth, strong brand strategy, omni-channel investment, and disciplined financial management position the company for resilient earnings and long-term profitability.

Catalysts

Through its subsidiaries, operates as an omnichannel retailer in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific.

• The persistent decline in mall traffic, especially among Gen Z and Millennial consumers, poses a significant threat to Abercrombie & Fitch's heavy reliance on physical retail locations, setting up a future where in-store sales shrink and fixed costs remain high, ultimately leading to deteriorating operating margins and greater earnings volatility.
  
• Demographic headwinds, including the projected long-term shrinkage in the teenage and young adult population in key Western markets, indicate a sustained decline in Abercrombie & Fitch's core customer base, which will put steady downward pressure on revenues as current momentum fades.
  
• The increasing shift toward sustainability and ethical sourcing by consumers may outpace Abercrombie & Fitch's ability to adapt at scale, resulting in heightened reputational risk and potential loss of market share to faster, more agile competitors that better align with these values, eroding long-term revenue growth and pricing power.
  
• Intensifying competition from fast-fashion and direct-to-consumer e-commerce brands is expected to squeeze Abercrombie & Fitch's margins through ongoing price wars and higher promotional activity, which will also drive down gross margin and profitability regardless of any short-term sales gains from marketing campaigns or brand partnerships.
  
• Ongoing global supply chain disruptions, higher tariffs, and rising transportation costs will add substantial unpredictability and inflationary pressure to Abercrombie & Fitch's cost base, making it increasingly difficult to preserve net margins and exposing earnings to recurring shocks that cannot be mitigated quickly due to the company's complex sourcing footprint.

Abercrombie & Fitch Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Abercrombie & Fitch compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Abercrombie & Fitch's revenue will grow by 3.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 10.6% today to 8.3% in 3 years time.
• The bearish analysts expect earnings to reach $472.5 million (and earnings per share of $11.18) by about September 2028, down from $541.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.5x on those 2028 earnings, up from 8.4x today. This future PE is lower than the current PE for the US Specialty Retail industry at 18.7x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.77%, as per the Simply Wall St company report.

Abercrombie & Fitch Future Earnings Per Share Growth

Risks

• Abercrombie & Fitch continues to deliver strong brand health with record second quarter net sales and 11 consecutive quarters of growth, pointing to ongoing revenue momentum and potential resiliency in top-line performance despite cyclical or short-term pressures.
  
• The company is investing heavily in omni-channel retail, expanding both digital and physical footprints, and reporting consistent traffic growth across direct channels and geographies, which supports strengthened customer acquisition and retention that could benefit long-term revenue and net margin.
  
• Strategic global diversification in sourcing and market expansion-especially growth in APAC and efforts in EMEA and the Americas-reduces regional dependency and enhances the company's ability to mitigate macroeconomic or regulatory disruptions, supporting overall earnings stability.
  
• Robust execution on high-engagement product cycles and collaborations, such as exclusive partnerships with high-profile brands like the NFL and effective marketing campaigns, enhances brand relevance and potentially drives higher average unit retail, improving gross margin and supporting profitability.
  
• The company's disciplined inventory management, experienced playbook for handling cost headwinds (such as tariffs), and strong cash flow used for share repurchases indicate prudent financial stewardship, which could cushion earnings volatility and drive shareholder returns over the long term.

Valuation

• The assumed bearish price target for Abercrombie & Fitch is $84.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Abercrombie & Fitch's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $145.0, and the most bearish reporting a price target of just $84.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.7 billion, earnings will come to $472.5 million, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 8.8%.
• Given the current share price of $96.35, the bearish analyst price target of $84.0 is 14.7% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.