This paper presents a structured SWOT analysis of Abercrombie & Fitch, the upscale casual apparel retailer, in the context of the post-2007 economic recession. The paper identifies a potential double-dip recession as the company's greatest environmental threat, noting the severe same-store sales declines experienced in 2009. It then examines expansion opportunities in emerging markets such as China, Brazil, and India, as well as domestic markets recovering from the downturn. The analysis highlights the company's strong cash position relative to its debt load as its chief organizational strength, while identifying consumer spending slowdowns as its primary weakness. Finally, the paper explains how A&F's financial strength can be deployed both defensively and offensively to weather threats and capitalize on market opportunities.
The retail industry has faced a number of challenges over the last several years, largely because the broader economy went through a severe recession. For Abercrombie & Fitch, the company stood at a crossroads — capable of surviving what had occurred while also being strong enough to capitalize on emerging opportunities. The company faced a number of unique situations highlighting both potential opportunities and possible threats. Fully understanding these variables requires a careful examination of the company itself.
Abercrombie & Fitch is one of the leading retailers of casual apparel, catering to men, women, and children. The company faced severe economic challenges beginning in 2007. Evidence of this can be seen in the stock's overall performance during the five years prior to this analysis: shares reached an all-time high of $80.00, then declined to $14.00 in 2009. Part of the reason for this decline was the inevitable economic slowdown. The company was ultimately able to overcome those challenges, with the stock climbing back to $47.00 per share (Abercrombie & Fitch, 2010). However, to fully understand the company's internal conditions, it is necessary to examine environmental threats, marketplace opportunities, organizational strengths and weaknesses, competitive positioning, and how those strengths can be used to benefit the company over the long term. Together, these elements provide the greatest insight into the internal environment of A&F.
The biggest threat that could affect A&F is a secondary slowdown in the economy — commonly referred to as a double-dip recession. This is a scenario in which the economy appears to be recovering, but then a crisis or incident causes it to slip back into recession. Such an event would have an immediate impact on the company's bottom line, as same-store sales could fall dramatically, causing earnings per share and the price of common stock to decline.
A clear example of this risk can be seen in the first quarter of 2009, when A&F reported that same-store sales were down 22% and net sales decreased by 19% during the quarter. If another slowdown were to occur within the following six to nine months, the company could experience comparable drops in both same-store sales and net sales (Abercrombie & Fitch Reports Fourth Quarter, 2009).
At the time of this analysis, A&F had the opportunity to expand into areas where many competitors had been faltering. The current recession had caused a number of specialty chains to go out of business, and the improving economic picture would allow A&F to expand its presence both domestically and internationally. This was a major opportunity, as the company could quickly move into markets such as China, Brazil, and India — emerging economies where mass consumerism had not yet fully taken hold.
The company could also expand into existing markets that were hit hard by the recession, such as South Florida and California. Once consumer spending began to recover, above-average growth in these markets would not be surprising. This would allow A&F to grow at a time when many in the retail industry were taking a wait-and-see approach.
The greatest organizational strength of A&F is its ability to control debt. During periods of economic prosperity, many companies finance their growth through debt. A&F, by contrast, focused on delivering consistent results and using additional profits to improve overall financial strength. As a result, its operations and departments functioned more effectively, because management pursued prudent growth strategies. This can be seen clearly in the company's balance sheet: A&F held $712 million in cash against only $111 million in debt (Abercrombie & Fitch, 2010).
The company's greatest weakness, on the other hand, is its vulnerability to a slowdown in consumer spending. Such a slowdown can occur when energy prices rise sharply or when a particular event negatively affects consumer psychology. Once this happens, same-store sales decline and the overall bottom line of the company begins to weaken.
"Using cash reserves defensively and offensively"
At the same time, A&F can use its substantial cash reserves to acquire competitors that have been severely weakened by tough economic conditions. This would allow the company to expand its reach within the retail industry and offset various economic shocks. Such acquisitions could be used to build profit margins and establish a presence in other areas of retail. Over time, this would increase the financial soundness of the company and improve its long-term success within the industry.
Clearly, A&F faces a distinct mix of opportunities, threats, weaknesses, and strengths. Given the company's strong financial position and early signs of economic improvement, it is well placed to capitalize on available opportunities while using its strengths to mitigate environmental risks. Once this strategy is executed, the company will be positioned to increase its overall dominance in the specialty retail industry.
Abercrombie & Fitch. (2010). Retrieved April 27, 2010 from Yahoo Finance website:
Abercrombie & Fitch. (2010). Retrieved April 27, 2010 from Yahoo Finance website:
Abercrombie & Fitch Reports Fourth Quarter. (2009). Retrieved April 27, 2010 from Abercrombie & Fitch website:
Abercrombie & Fitch. (2010). Retrieved April 27, 2010 from Yahoo Finance website:
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