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Abercrombie & Fitch tries to keep its shirt on as sales slacken

The trendy teen apparel chain has suffered after refusing to cut prices, yet it resists big discounts. The retailer hopes win back customers by emphasizing edgier fashions.

August 15, 2009|Andrea Chang

Abercrombie & Fitch Co. raised eyebrows last Christmas when the teen retailer insisted it would ride out the recession without resorting to widespread price-slashing.

Then came months of massive double-digit sales declines and dwindling store traffic as shoppers defected to competitors that sold similar clothes at more affordable prices. Industry experts wondered whether the company was risking its business in its attempt to uphold its brand image.

At the same time, Abercrombie was criticized for missing several fashion trends, for instance, waiting too long to offer casual dresses and relying too heavily on its graphic T-shirts.

"It's fair to say they've lost a good chunk of customers," said Howard Tubin, a retail analyst with RBC Capital Markets.

In May, Abercrombie acknowledged that it had underestimated the financial pressures that consumers were facing. Since then, the retailer, which has cultivated a sexy-and-trendy image through shirtless store greeters (male) and ads featuring scantily clad models (male and female), has quietly been reducing prices and putting more items on its clearance racks.

"The learning is that we are in very tough economic times, where price has become more of an object for us than it ever has been, and we are using this strategy to drive traffic during this time," Abercrombie Chief Executive Mike Jeffries said during a conference call with analysts Friday.

But shoppers say they haven't noticed a change.

At the Glendale Galleria this week, Lindsey Ochinero and daughter Macaella, 12, were back-to-school shopping at Abercrombie, where nearly everything was full price.

Unlike rivals American Eagle Outfitters and Aeropostale nearby, Abercrombie didn't feature sale signs or special offers, and its clearance items were in the back. The pair soon left empty-handed.

"Ridiculous -- $60 for a pair of shorts? It's not even a designer brand," said Ochinero, a medical and legal transcriptionist from Fresno. "They're sabotaging themselves. In the most desperate of times, what makes them so exclusive?"

Despite Abercrombie's efforts to lower prices, "average unit retail price was down only 5% year over year in the second quarter -- that's not enough for the customer to even notice or get excited about," RBC's Tubin said. "There needs to be further movement."

Abercrombie executives say they never promised huge discounts. Despite being more mindful of consumers' budgets, the company still needs to maintain its status, especially as it looks to expand internationally, said Eric Cerny, manager of investor relations.

"If we go in and do a short-term fire sale and cut prices and fight the economy that way, we'd end up doing damage to the long-term aspirational appeal of the brand," Cerny said in an interview. "We know price is a component, but it's not going to be the component that drives our model. It never has been."

Instead, the firm is tackling the recession modestly from the price end and aggressively from a fashion standpoint.

After many of its styles last year missed the mark, Abercrombie has worked to correct its merchandise mix by bringing new fashions front and center, a shift away from its usual trendy-but-simple apparel. The brand has begun to offer an expanded selection of dresses and print tops for women and fewer basics such as logo T-shirts, which were among the weakest performers in the second quarter that ended Aug. 1.

The fresh offerings have helped entice customers back to the stores, and several items, including plaid shirts and casual dresses, have sold well, said Christine Chen, a retail analyst with Needham & Co.

"The price points have certainly hurt them, but I think last year that was particularly exacerbated by the fact that Abercrombie didn't offer much fashion newness," she said. "Now they're actually offering fashion and have brought ticket prices down in some key categories. I realize that's not reflected in their sales numbers, but that doesn't happen overnight."

On Friday, Abercrombie -- which has about 350 namesake stores nationwide and is the parent company to other brands including Hollister Co. -- reported a net loss of $26.7 million for the second quarter and said sales at stores open at least a year plummeted 30% compared with the same period last year. In the year-earlier quarter, the retailer posted a profit of $77.8 million.

In June, the company said it would close its "post-grad" Ruehl division because of the recession and its negative effects on the chain's business.

Abercrombie will continue adjusting its merchandise mix and cutting costs, executives said. They also hinted that the company might close some underperforming stores when their leases expire.

Although Abercrombie has been one of the teen sector's poorest performers this year, it is still considered the elite youth brand and has no long-term debt, Chen said. That positions it to weather the downturn better than many.

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