Abercrombie and Fitch Case Study Solution
The rationale for the closure of local stores:
There can be many reasons which enforce the management of A&F to close the local stores of US dramatically. Firstly, the stores which were closed are not performing up to the mark. The profits of the stores were reduced drastically and the sales revenues were also subject to drastic reduction. Moreover, the stores were also not located in the places which are in line with the policies of A&F.
The international expansion policy of the company is also another reason due to which the stores are closed. In order to expand internationally, A&F have to cut down the number of stores operating in the US in order to save substantial expenses. In order to maintain the image of A&F’s all four brands, it is very critical to operate in the locations where the targeted customers of A&F easily and frequently visit.The redundant stores were not located in the area where the main target customers of A&F visit thus the stores were closed.
Recommended international markets:
The recommended international markets for A&F are China and India,apart from Japan and Singapore there are no stores of A&F in Asia. Asia represents a significant market for high-end clothes retailing. China and India have huge populations which increase the likelihood of the success of international brands in these countries. Due to the substantial improvements in the economic condition of this region, the demand for the products of A&F is also expected to be very high.
Furthermore, the recent successful expansion of many other clothing brands in these countries reflects the positives of these markets for A&F. In addition to this, the governments of these countries are also implementing various favorable laws and regulations for foreign brands which make India and China most favorable places for A&F to expand their operations.
Changes in thedirect-to-consumer operation of A&F:
The direct-to-consumer operations of A&F have seen a dramatic change in recent times.The revenues from this operation have been increased by an extremely high rate. Direct-to-consumer operations are conducted online from the four different websites of A&F.Each brand of A&F has its own personal website. The designing of the websites is based on the ambiance of the stores of that brand, the websites are appealing to the customers of all ages.
There are many factors which resulted in the drastic change in the operations of direct-to-consumer. The increasing trend of e-shopping has led to significant increment in the revenues from websites. Furthermore, the appealing and attractive nature of the websites is also responsible for these favorable changes. However, the effective decision making of top management of A&F is the biggest reason for this change, even during the great economic recession of 2008-09, the revenues of this segment increased by a very good rate.
International expansion policy of A&F:
It can be said that the international expansion policy is very effective and successful.All the international expansion projects have resulted in better financial and operational results than projected and all the international expansion of A&F have performed better than the local operations in the US. The sales from international expansion are almost twice as generated by the similar number of stores in the US, the profit margins are also very high in the international stores which reflect the success of international expansion strategy.
However, there are some flaws as well in the international expansion strategy such as the management of A&F takes substantial time in finalizing the international expansion location.Although it could be favorable given the intensity of competition in the international market, it would be more beneficial for A&F to expand aggressively in those countries. Furthermore, the international expansion has been made very late, the fact that A&F was operating more than a century ago makes it very late to expand internationally in the year 2005. No importance has been given to any Asian country by A&F, sales from Asian countries especially China and Middle Eastern countries could be more favorable than the sales from other international stores.
Financial performance of A&F:
The financial performance of A&F seems to be very favorable.The debt ratio is very lower which reduces the risk of investors, the investors could make their returns lower because of this minimal risk. Furthermore, the company can also get additional finance from outside sources very cheaply and easily. It is also possible that the debt providers will not impose any covenants because of this lower debt ratio. The current ratio is also very good, the ideal current ratio for any company operating in any sector should be 2:1. The current ratio of A&F exceeds this pre-defined benchmark, the company can easily pay off its current liabilities from current assets thus making favorable liquidity conditions for A&F.
The cash reserves of A&F are also very high; the company has more cash than its long-term liabilities. In order to save interest cost and reduce the debt ratio even further, management of A&F could easily repay the debt which will improve the profitability position more. Moreover, the cash can also be used to exploit various opportunities available to the company and various international expansion projects could also be undertaken by utilizing this cash. There is a very positive increase in the sales of A&F in the last year, in the presence of intense competition in both the local and international market from both international and local competitors.This increase depicts the very favorable financial performance of A&F. Dividend payout ratio is also extraordinary, usually, the companies which have surplus cash and are performing well give such high dividends, and same is the case for A&F....................
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