Abercrombie & Fitch Engulfed By Inventory Issues & Negative Press

Things haven’t been going well for Abercrombie & Fitch (NYSE:ANF) for a while. Although the company is one of the leading specialty retailers in the U.S., its growth has stalled in part due to inventory management issues. It went through most of fiscal 2012 trying to clear surplus inventory that weighed on its comparable store sales growth. In early fiscal 2013, Abercrombie’s inventory levels dipped too low, resulting in a terrible quarter in terms of comparable store sales.

To add to this, the company has been subject to negative media in the recent past. A few months back, the retailer faced a lot of criticism over its CEO’s remark that the brand only went after the “cool kids”. Recently, it again drew negative headlines with its discriminatory staffing policies in Europe. Although such incidents are unlikely to cause a dip in Abercrombie’s sales in the near term, customers could shift to other retailers over time if the company doesn’t modify its approach.

Severe Criticism Over Not Offering Clothes For Plus-Sized Women

Abercrombie’s Offensive Statement

Abercrombie got in hot water over its decision to caters to a limited customer demographic as it does not offer XL, XXL and above 10 sizes for women. ^[1] The company feels that making clothes for all demographics can make its business boring and products unattractive. Keeping a firm focus on thin women will allow it to maintain a distinct position in the apparel market. Back in 2006, Abercrombie’s CEO Mike Jeffries stated that he exclusively wanted to target slimmer, better looking and popular “cool kids” as his business was mostly about sex appeal. ^[1] This statement came across as extremely offensive to a large section of people.

Media And Customer Response

Abercrombie has faced significant criticism in the media. Its strategy was mocked in The Ellen DeGeneres Show and its Facebook (NASDAQ:FB) page has been stormed with negative comments. ^[2] There was another similar incident when an Abercrombie executive said the brand only wanted to associate itself with customers of a certain stature and was not intended for poor people. ^[3] A YouTube video featuring a person donating Abercrombie clothing to a homeless man and criticizing the brand hit seven million views in two months. ^[4] The photos of a plus sized blogger, who shot photographs of herself in Abercrombie’s suggestive adds, have gone viral over the Internet. ^[5] In addition, a number of protesters gathered outside the company’s Michigan Avenue store a couple of months back criticizing it for not offering size 14, which is worn by an average U.S. woman. ^[6]

Damage Control

In response to this upheaval, Mike Jeffries took back his comments and apologized for his choice of words. ^[2] The company launched an anti-bullying campaign subsequently, suggesting that it did not mean to hurt anyone’s sentiments. Through this campaign, Abercrombie is offering college scholarship to academically strong high school students who were bullied in school. ^[7] However, these efforts have met with a negative response. The company reported its Q1 results amid these criticisms and reported a staggering 17% decline in comparable store sales. Although inventory management was the biggest contributor, we believe that the deteriorated brand image also had a small part to play.

Now, It’s Under Investigation For Discriminatory Staffing Policies

Abercrombie is being investigated by France’s official human rights watchdog under the suspicion of hiring store staff on the basis of physical appearance. ^[8] While the company admits that it hires models to stand outside its stores to attract customers, the organization believes that these models also serve as sales associates. According to the human rights organization, physical appearance might be considered for employing a model but not for sales staff.

Although there isn’t any strong evidence to prove these allegations, the issue negatively impacted the company’s brand image again. Given that Abercrombie is already facing problems with expansion in Europe and only has nine stores in France, any negative publicity can hinder its growth. ^[9] We believe that apart from its controlled expansion in Europe and better inventory control, Abercrombie needs to take some solid steps to elevate its brand image.

Our price estimate for Abercrombie & Fitch stands at $49, which is inline with the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Abercrombie & Fitch Refuses To Make Clothing For Large Women, Business Insider, May 3 2013 [↩] [↩]
2. Abercrombie & Fitch’s big, bad brand mistake, The Washington Post, May 22 2013 [↩] [↩]
3. Would You Rather Go Naked Than Wear Abercrombie, Vogue, May 16 2013 [↩]
4. Abercrombie & Fitch Gets a Brand Readjustment #FitchTheHomeless, YouTube, May 13 2013 [↩]
5. To: Mike Jefferies, C/O Abercrombie & Fitch, The Militant Baker, May 19 2013 [↩]
6. Abercrombie & Fitch Faces Protests, Backlash for Not Selling Larger Sizes, ABC News, May 15 2013 [↩]
7. Abercrombie Anti-Bullying Campaign Met With Surprise, Criticism From Protesters, Huffington Post, June 11 2013 [↩]
8. French Watchdog probes Abercrombie for discrimination, Reuters, Jul 24 2013 [↩]
9. Abercrombie & Fitch’s SEC filings [↩]