In analyzing the financial statements for Abercrombie and Fitch (A&F), it is apparent that a few key areas are greatly affecting the profitability of the company. These areas include the lack of sales growth, the increase in cost of goods sold and the substantial increase in operating expenses. It is imperative for the management team to creatively find ways to reduce these costs in order to return the profitability margins back to the 2008 numbers.
Profitability is the greatest area of concern regarding the financial ratios of A&F. Over the past three years, flat sales revenue and increasing cost of goods have led to diminishing gross margins. These reduced gross margins coupled with substantial increases in operating expenses have resulted in substantially lower operating and ...view middle of the document...
Asset Management efficiency is an area that could be improved to some extent. In comparison to the industry standard, the inventory turnover and total asset turnover are slightly below average. While these relatively low turnover numbers are likely a result of their higher prices, it is important to identify areas that can be improved.
It is obvious from looking at the financial statements that the economy has had a tremendous effect on the performance and strategy of A&F. Since 2008, A&F has reduced their total number of stores by 28 stores as a result of lack of sales and profitability. Due to the uncertainty in the economy, A&F has chosen to maintain high positions in cash rather than investing in future capital expenditures. While this is understandable during these uncertain times, growth is an integral part of the success of the company and it is extremely important to continue to find new locations to increase the revenues for the company.
We believe Europe and Asia are two target markets that offer a tremendous opportunity for growth. While A&F currently is operating in these markets, it is our recommendation for A&F to increase their presence in these markets in the near future. In addition, we recommend that the management team arduously try to control costs. This can be accomplished by renegotiated their lease agreements, renegotiating their manufacturing agreements, more efficiently managing the payroll and incentivizing the store managers to reduce their utility expenses. Overall, we feel that the management team has done an admiral job of managing their business through these economic times, however, it is urgent for A&F to invest in capital expenditures that will grow their revenue while continually finding strategic ways in which to reduce and control manufacturing and operating expenses.