Abercrombie & Fitch Slips Again; Plans To Remove Logo Products Altogether

Following a slight slowdown in its revenue decline in Q1 fiscal 2014, Abercrombie & Fitch‘s (NYSE:ANF) net sales fell by 6% in the second quarter, as it recorded its 10th straight quarter of comparable sales decline. The retailer’s shares stumbled by close to 10% after the earnings release as its revenue decline was worse than analysts’ prediction of 4%. Including direct-to-consumer revenues, Abercrombie’s comparable sales declined by 5% in the U.S. and 9% in international markets. Interestingly, the retailer’s online sales growth in the U.S. at 5% was much slower than what its counterparts have seen in the recently concluded quarter. ^[1] This is not a good sign for Abercrombie.

However, that comparable sales at Abercrombie & Fitch were down just 1% was a bright spot in the otherwise lackluster Q2 results. The company stated that it has made significant progress in evolving the fashion component of its merchandise range, which helped its namesake brand’s results. Encouraged by this, the company stated that it will remove most basic logo bearing products from its U.S. stores by spring 2015.

Over the last few years, U.S. buyers have shunned basic logo products at retailers such as American Eagle Outfitters (NYSE:AEO), Aeropostale (NYSE:ARO) and also Abercrombie, for more affordable and trendy brands such as Zara, Forever 21 and H&M. As a result, these companies have been slowly transitioning their portfolio to more fashionable non-logo range.

Our price estimate for Abercrombie & Fitch stands at $39, which is about 5% below the current market price.

See our complete analysis for Abercrombie & Fitch

With its fashion doing well and logo business under performing, Abercrombie’s recent move makes sense. While customers weren’t showing significant interest in the retailer’s logo t-shirts, shirts and hoodies, they exhibited tremendous affinity towards its trendy jeans, dresses and skirts. The company’s COO, Jonathan E Ramsden, stated that they have seen tremendous improvement in their non-logo business over the past several quarters. Abercrombie has been working on improving its designs, shortening lead times and increasing style differentiation to offer a better variety of fashion assortments and remain responsive to changing trends. Abercrombie’s partnership with First Insight Inc has helped it test products before their launch and incorporate customer feedback in design.

During the earnings call, Mike Jeffries commented that the company was selling fashion at a rapid pace, which has encouraged them to substantially reduce the proportion of logo products. ^[2] Abercrombie is finally taking an aggressive step towards enhancing its fashion content, which has become the key to survival in the current retail environment. Mr. Jeffries stated that the company is looking to reduce its logo portfolio to “practically nothing” by spring next year. However, Abercrombie will continue to sell its logo products in international markets.

While increasing reliance on fashion makes sense, Abercrombie runs the risk of losing customers if it decides to shrink its logo business to an immaterial size within a year. Although this transition is important, it needs to be at a pace that buyers are comfortable with. Such product overhauls haven’t been too successful in the past, which is evident from Aeropostale’s misfired fashion launches last year.

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1. Abercrombie & Fitch Reports Second Quarter Results, Abercrombie & Fitch, Aug 28 2014 [↩]
2. Abercrombie & Fitch’s Q2 fiscal 2014 earnings transcript, Aug 28 2014 [↩]