The clock is ticking on Abercrombie & Fitch Co.s strategy of selling high-priced teen clothing as the recession erodes sales and profit margins, and competitors outrun it.
The New Albany, Ohio, company, which is expected Friday to report a quarterly loss of seven cents a share excluding charges, has refused to offer deep discounts, allowing lower-priced rivals such as Aeropostale Inc. and American Eagle Outfitters Inc. to build sales and finance attacks on Abercrombies childrens and young adults sales.
Aeropostale has posted increases in sales at stores open at least a year of 11% and 12% for the first and second quarters of this year. In June, it opened its first P.S. from Aeropostale childrens brand store taking aim at Abercrombies childrens clothing.
Getty ImagesAbercrombie & Fitch is expected to report lower sales Friday as it clings to a high-priced strategy. Customers browse a New York store in July.
High prices and a reputation for scantily clad models for years generated some of the best profits in the teen business. But that is no longer the case, said Richard Jaffe, a managing director at brokers Stifel Nicolaus & Co.
From 2002 to 2007, Abercrombies operating margins hovered slightly below 20%. But last year, Abercrombies operating margin fell to 13.3% and should fall to just 3.9% this year, said Mr. Jaffe.
Abercrombie Chief Executive Mike Jeffries declined to comment ahead of quarterly earnings. Abercrombie has been reluctant to alter its pricing strategy in part because it believes it is the key to international growth, embodied by its large store in London. The strategy overseas is to sell its clothing as a luxury American brand.
To preserve that air of exclusivity, the London outpost, a tourist magnet, doesnt offer discounts or promotions of any kind. A mens polo shirt that retails for $60 in New York sells for £60 ($99) in the London store, which continues to post year-over-year increases in monthly sales. The company plans to open a large store in Milan in October and in Tokyo in December.
Even so, it has several times embarked on price cuts to move unsold inventories. Abercrombie has insisted the markdowns are highly selective. They are noted subtly by small signs on tables, not the large red signage in store windows deployed by competitors. Even on sale, a typical Abercrombie item often remains pricier than offerings from its peers.
But there are signs it is edging toward deep price cuts. At a San Francisco store in late July, more than 25% of its clothing was on promotion, compared with just 10% a year earlier, according to Ann Poole, an analyst at investment bankers Stephens Inc. Earlier this year, bowing to pressure from Wall Street, the company said it would lower ticketed prices at its Hollister and abercrombie childrens brand for spring 2010.
They dont want to destroy the brand positioning that they have, which is the cool shop in the mall, says Marie Driscoll, a retail analyst at Standard & Poors Equity Research. But cool is changing. And part of cool now is value.
The company, which earlier this decade settled suits alleging discrimination against Asian, African-American and female employees, was fined about £9,000 ($14,800) by a British court Thursday for unlawfully dismissing a London store employee with a prosthetic arm. The company called the dispute a misunderstanding and based on the events of a single day.
Wall Street is pushing Abercrombie to abandon its high prices, which can be double what its competitors charge for similar clothing.
Analysts say the luxury image is failing to resonate with consumers amid the recession.
Some analysts said Abercrombies luxury-priced strategy delivers stronger cash than its rivals despite the sales decline. While cash flow from operations fell 40% last year, to $490.8 million, it far outstripped the $202.1 million generated by Aeropostale. The company ended its fiscal year in January with $522.1 in cash and just $100 million in debt.
But a year of sharp sales declines could put the company in a precarious position, Stifel Nicolauss Mr. Jaffe said. He believes the company is trying to ride out the recession, relying on its cash to support the stance.
The feeling is: Weve got the cash, weve got the brand the worst thing we could do is act like theres a fire sale, Mr. Jaffe says. Its not a question of survivability at this point. Its a question of returning to historical levels of viability.
