Abercrombie & Fitch No Longer Stands Out in a Crowd
Abercrombie & Fitch is caught between a rock and a hard place. The brand's exclusivity that worked so well in catapulting it to the top of teen retailing has stopped working of late, but the changes it needs to implement to reverse four straight quarters of declining sales offer little opportunity to stand out from the great mass of other teen clothiers, risking a future of dullness and mediocrity. In short, it could be doomed to irrelevance if it doesn't act, and yet it may still face that outcome even if it does.
The factors creating this untenable position have been mounting for some time but came to a head last year and attracted the attention of activist shareholder Engaged Capital, which believed it wasn't necessarily a problem with the brand that was dragging it and its stock down, but rather those who were running the company. Despite having a well-regarded global brand generating nearly $700 million annually in direct-to-consumer revenues and gross margins above those of the competition, on almost any other metric examined, Engaged said an observer would find Abercrombie woefully lagging behind its peers.
That suggested new leadership was needed and the hedge fund sought to have longtime Chairman and CEO Michael Jeffries ousted. Thus began a long running battle that saw the board initially only grudgingly accommodate the investor's demands, such as splitting the roles of chairman and CEO, until it finally acquiesced and grant Engaged Capital four seats on the board.
Still, they've got their work cut out for them. In addition to dramatically declining total sales, comparable-store sales, or those that have been opened for a year or more -- an important retail metric that shows the health of a retailer because it indicates organic growth, not that achieved by opening more stores -- sharply slid, too. It hasn't had a single quarter of positive comps in more than two years.
Now Abercrombie wants to shake things up. Bloomberg News reports the teen retailer is muting the "nightclub vibe" its stores exude by raising the lights, cutting back on scenting its aisles, and minimizing the signature logos that have long been a hallmark of Abercrombie's brand. Coupled with previously announced plans to feature its clothes on Amazon.com's website (though customers would be directed to A&F's to complete the sale), agreeing to sell more third-party items in its stores, and allowing third-party retailers to sell its clothes, it's clear Abercrombie is undergoing an extreme makeover. Heck, it's even willing to sell black clothes, an item long held as taboo due to its CEO's aversion to them.
The Abercrombie stores are eliminating the large black shutters from the storefront and will soon feature mannequins displaying its threads, a first for the company. It also will become more trendy, adopting the fast-fashion ethic of cheap, runway duds that turnover frequently and have been popularized by current retail leaders like H&M, Forever 21, and Zara.
Yet all of these radical changes (for Abercrombie) add up to... meh. It risks looking like every other teen retailer in the mall. Aeropostale, its own sales and profits tanking, has chosen to tone down its logo-heavy apparel, while American Eagle Outfitters, another logo-centric teen retailer, is witnessing an even larger hit to its base and announced plans to close even more stores. It will likely have to change its marketing as teen customers shun such up-front branding.
As everyone races to the middle, there doesn't appear to be much that will differentiate Abercrombie & Fitch from the competition. And as it's a late-comer to the fashion-forward trend -- heck, even Sears Holding is breaking that way -- the former preppie outpost risks becoming just another me-too retailer. No doubt it needs to make changes, but it's hard to see how the corrections will fix the problem, and by being a wallflower, it may go unnoticed both by teens and investors.
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The article Abercrombie & Fitch No Longer Stands Out in a Crowd originally appeared on Fool.com.Rich Duprey owns shares of Abercrombie & Fitch Co. The Motley Fool recommends and owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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