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Will Abercrombie & Fitch's "Buy Now, Pay Later" Plan Lock in Gen Z Shoppers?

Abercrombie & Fitch (NYSE: ANF) recently partnered with payment solutions provider Klarna to let U.S. shoppers split purchases into up to four interest-free payments over two months. A&F is aiming this "buy now, pay later" system -- which its rival Urban Outfitters (NASDAQ: URBN) has also adopted -- at younger shoppers with less spending power.

That strategy would complement A&F's ongoing efforts to win back Gen Z and millennial shoppers, many of whom were lured away by fast fashion competitors. Under CEO Fran Horowitz, who took the helm in late 2017, A&F aggressively ramped up its social media campaigns, renovated its stores, refreshed its collections, and even launched a high school tour to discuss shopping habits with over 100,000 teens.

Image source: Getty Images.

Why A&F needs more Gen Z shoppers

Horowitz's core strategy for winning back teen shoppers was to shrink its weaker namesake brand while expanding its higher-growth Hollister brand. The overall company now generates most of its revenue from Hollister, and the Southern California-inspired brand's growth has outpaced the weaker numbers from A&F over the past year.

Brand

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Hollister

6%

4%

4%

6%

2%

A&F

3%

2%

1%

(2%)

1%

Total

5%

3%

3%

3%

1%

Comparable store sales growth. Source: A&F quarterly reports.

Hollister's growth decelerated significantly in the first quarter, mostly due to tougher competition and a challenging year-over-year comparison. However, A&F noted that sales of Hollister's apparel stayed robust, and that other engines -- like its new swimwear brand and Gilly Hicks activewear and lingerie brand -- will feed its future growth.

Unfortunately, only 3% of American teens ranked Hollister as their favorite clothing brand in Piper Jaffray's latest "Taking Stock with Teens" survey. That marked progress from previous years, but Hollister still ranked fifth behind Nike, American Eagle Outfitters, Adidas, and Forever 21, in that order. A&F's namesake brand, which it's pivoting toward older Gen Z and Millennial shoppers, failed to crack the top five.

Image source: Getty Images.

Abercrombie & Fitch is also increasingly dependent on the growth of its U.S. business, which grew its comps 4% last quarter, to offset its declines in Asia -- a once-promising market which was deflated by competition, currency headwinds, and a looming trade war. That's why A&F needs to gain more Gen Z and millennial shoppers in the US.

But will "buy now, pay later" work?

Only a third of millennials have credit cards according to Bankrate. The average millennial in the U.S. also has a net worth of just $8,000 according to Deloitte, which gives them significantly less spending power than previous generations. Most Gen Z shoppers don't have credit cards yet. They mostly use debit cards or linked payment apps, which restrict purchases to the amount of cash in their bank accounts.

That's where interest-free payment companies like Klarna and Afterpay come in. Letting merchants split their purchases into installments can attract and lock in more shoppers. Klarna's rival Afterpay, which runs a "buy now, pay later" program for Urban Outfitters, claims that its service boosts conversion rates and incremental sales by up to 30%.

This isn't a new idea -- auto dealers offer installment plans for vehicles, as do big box retailers for big ticket items like appliances and electronics. However, installment plans for clothing is a new idea, and it's unclear if Gen Z and millennial shoppers will bite.

Will this move the needle for Abercrombie & Fitch?

I doubt that letting younger shoppers pay in installments will instantly boost A&F's comps, which are expected to rise by the low single-digits this year. Instead, it highlights A&F's growing dependence on shoppers who simply don't have much spending power -- which could be considered a long-term headwind for the apparel retailer.

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Leo Sun owns shares of American Eagle Outfitters. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.


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