Abercrombie & Fitch margins to shrink as cotton prices rise

Analysts at Trefis highlight in a note to investors that Abercrombie & Fitch‘s (NYSE:ANF) overall EBITDA (earnings before interest tax depreciation & amortization) margins have trended in a wayward manner over the past five years.

As pinpointed in a market research note Tuesday, Trefis analysis team covering the stock said that from 24.6 percent in 2010, margins declined to 22 percent in 2011, mainly due to a sudden rise in cotton prices arising from a shortage in supply.

It is worthy a note that from 0.84 dollars per pound in July 2010, cotton prices rose to 2.30 dollars per pound in March 2011. “The major factor behind this price increase was the drought in Hubei province of China, a major cotton producing area. Government restrictions on exporting cotton out of India and a devastating flood in Pakistan further contributed to the supply shortage. Being the prime raw material for the apparel industry, surge in cotton prices increased production costs considerably for apparel retailers,” notes Trefis.

“As cotton prices eased out, Abercrombie’s margins recovered to 24.1 percent in 2012, but declined again to 22.6 percent in 2013, when the company ushered heavy markdowns to compensate for low store traffic. This is turn resulted from a pullback in consumer spending on premium apparel and gradual customer shift to online channel.”

In 2014, margins surprisingly improved to 23.8 percent despite heavy markdowns, due to a fall in expenses related to closed under-performing stores. However, going forward, Trefis analysts expect the retailer’s overall EBITDA margins to decline slightly in the near term and stabilize over the next three-four years. “

We believe that Abercrombie will continue to offer heavy discounts on its products amid fierce competition from fast-fashion players and falling foot traffic across the industry,” conclude the research team covering A&F.