‘Lack of direction’ behind another A&F sales decline

Same-store A&F sales fell another 10 per cent in the first quarter, driving a US$61 million loss.

Unfortunately for A&F (Abercrombie & Fitch), this is one of the worst times to be trying to reinvigorate a broken brand. Not only is consumer interest in clothing becoming weaker, but reduced mall traffic and an oversupply of retailers, stores, and space in the apparel market all add up to a highly unfavorable backdrop.

There is no doubt that many of these negative factors affected Abercrombie over the first quarter, just as they did other retailers. However, with a brand that continues to lack clarity and definition, the impact is particularly punishing. As such, it is no surprise that comparable sales at Abercrombie are down.

A&F has taken some solace in the fact that the pace of decline has eased since last quarter and became milder in the latter months of this period. However, while we accept that the company has undertaken some initiatives that could produce some ‘less bad’ numbers, we believe that this effort is insufficient to make a sustainable difference.

While we understand the rationale behind the brand reinvention and agree with the general direction, we think there are two main barriers to A&F executing successfully.

Lack of clarity

The first of these is a continued lack of clarity on what Abercrombie is and who it is targeted at. There have certainly been improvements to assortments and product quality, but this alone is not enough. The brand needs to resonate with its target audience and, at present, it remains unclear just who that target is. Abercrombie was once the cool kid who everyone wanted to hang out with; it now finds itself alone and in desperate need of friends.

Unfortunately, there is no quick fix to brand reinvention, not least because today’s market is so crowded with offerings that consumers are almost tired of having too much choice. However, a logical step to success is to have a very strong season with some key pieces and designs that get people talking and interested. In our view, current ranges simply do not deliver on this objective.

Slow pace

The second issue in turning around the brand is the relatively slow pace of change. Abercrombie is, for example, rolling out some new store formats – but not at anywhere near enough scale to have a material impact on sales. In our view, this slowness is a symptom of the lack of clarity and direction; a better understanding of where it wants to head would allow Abercrombie to move much faster.

Fortunately, Hollister performed better with a 3 per cent sales increase. The fact that A&F has managed to reposition that brand provides some hope that it might, eventually, do the same for Abercrombie.

Unfortunately, the room for maneuver is becoming narrower as financials start to unravel. Losses increased this quarter to $61 million. This signals that last year’s small full-year profit could well turn into a loss if A&F cannot re-engineer the business.

Ultimately, A&F could play its ‘get out of jail free card’ and opt to sell the business – as has been rumored. However, the challenge would be finding a buyer that wants to pay a reasonable amount. As A&F well knows, there is much work to be done before the business is back on an even keel, and with no guarantee of success, any deal would be a big gamble for the new owner.

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