Because real estate is such a major cost for retailers, revenue per square foot is a crucial operating metric in the retail industry. In this article we analyze historical revenue per square foot data for several important players in the U.S. retail apparel market:
Abercrombie & Fitch
Key trends: Upscale brands like J.Crew and Abercrombie & Fitch outperformed the market between 2005 and 2007. Value brands like Aeropostale gained market share during the recessionary period from 2007 to 2009. The data suggests that specialty retail brands can be expected to outperform as the economy recovers. Our analysis follows below.
2005-2007: Upscale brands outperform
From 2005 to 2007, U.S. apparel sales increased at an annual rate of around 4%, reaching $196 billion in 2007. This growth was largely driven by the specialty apparel segment, which includes retailers like Gap, Abercrombie & Fitch and J.Crew. Specialty apparel grew at an annual rate of around 7% during this period and constituted nearly 40% of total apparel sales by 2009.
Most specialty retail brands saw growth in revenue per square foot during this period of strong U.S. consumer spending, but premium brands did particularly well. Between 2005 and 2007, Abercrombie & Fitch leveraged its premium brand image to increase its revenue per square foot from $430 to $480.
Similarly, Gap's premium Banana Republic brand maintained revenue per square foot at the $550 level during this period. However, revenue per square foot fell at the company's lower-priced Gap and Old Navy stores.
Going forward we expect revenue per square foot to grow steadily for both Gap and Abercrombie. You can drag the trend-lines in the charts below to create your own forecasts and stock price estimates for the two companies.
2007-2009: Value brands gain share
The second half of 2007 was shadowed by the subprime mortgage crisis, which led to the recession of 2008 and 2009. U.S. consumer spending fell sharply during this period, and U.S. apparel sales declined at an annual rate of around 3% from 2007 to 2009.
Those were good years for value brands like Aeropostale, which increased its revenue per square foot from $540 to $630 during this period. But upscale brands that focused on traditional styles and provided value for money did better than their more fashion-forward cohorts in the luxury segment.
Exhibit A: J. Crew, which sells classic apparel, sustained its revenue per square foot at nearly $550 during this period. On the other hand, fashion-forward Abercrombie & Fitch saw its revenue per square foot decline from $480 to $370 between 2007 and 2009.
Strong recession brands should outperform going forward
We expect the U.S. apparel industry as a whole to grow going forward, as the economy recovers and consumer spending picks up. But we expect the specialty retail segment to outperform. Revenue per square foot for established players like Gap and Abercrombie & Fitch should approach pre-recession levels during the Trefis forecast period, providing some upside to their stock prices.
Aeropostale and J. Crew both performed well during the recession, boosting revenue per square foot to historic highs. We expect revenue per square foot at both chains to reach the $700 mark by the end of the Trefis forecast period. As a result we see significant upside for these two stocks.
You can see
our complete $53.34 stock price estimate for Abercrombie & Fitch here.
You can see
our complete $42.35 stock price estimate for J.Crew here.
You can see
our complete $33.87 stock price estimate for Gap here.
You can see
the complete $54.78 Trefis price estimate for Aeropostale here.
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