Will Abercrombie & Fitch’s Recent Moves Help It Recover?

Once the most sought after apparel brand in the U.S., Abercrombie & Fitch (NYSE:ANF) has faced a wide array of problems over the last couple of years. The retailer’s inventory management has been below par, which has often resulted in inventory surplus or shortage situations, that have ultimately translated to weak sales. The company’s CEO Mike Jefferies’ controversial comments regarding his target audience have severely hurt consumer sentiment  and Abercrombie’s brand image. Lately, while U.S. buyers have shunned basic merchandise at several casual apparel retailers for more trendy and affordable merchandise at Zara and Forever 21, Abercrombie has sustained its heavy reliance on basic logo products. Although the company has taken some measures to enhance its fashion content, it hasn’t seen any measurable results so far.

In an attempt to bring in some fresh changes to its brands’ design and selling strategies, Abercrombie hired a new president (Christos Angelides) in June. While it was expected that Mr Angelides will formulate some relevant strategies to revamp ANF and abercrombie kids, very few would have anticipated the the changes that have since occurred. During its Q2 2014 results, Abercrombie said that it will phase out its logo products by spring 2015 in an attempt to overhaul its brand image. The company stated that it has made significant progress in evolving the fashion component of its merchandise range, which is why it is trying to push them aggressively. However, we believe that by discontinuing logo products altogether, Abercrombie can lose a lot of customers to American Eagle Outfitters (NYSE:AEO), Urban Outfitters (NASDAQ:URBN)and Aeropostale (NYSE:ARO).

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

See our complete analysis for Abercrombie & Fitch

New Brand President has Tremendous Experience in Apparel Retailing

Christos Angelides has more than 28 years of experience in retailing. He spent his entire career at Next Plc, a six billion dollar U.K. based fashion retail chain, where he held a number of senior management positions. Some of his key roles include general manager of Next’s sourcing office in Hong Kong, menswear product director and womenswear product director. Angelides’s most recent position at Next was group product director, where he had been since 2000, overseeing buying, designing and quality of merchandise. ^[1]

Next Plc operates close to 700 stores in 40 countries and an Internet & catalog business in 60 countries. The company has posted solid sales and profit growth, as well as strong shareholder returns, during Angelides’s tenure as the group product director. Angelides also held the positions of chairman of Next Sourcing Limited and non-executive director of Lipsy, a young women’s fashion brand owned by Next. Abercrombie’s CEO Mike Jefferies stated that Angelides’s strong expertise in apparel retail made him the prime contender for the president’s position. He believes that Angelides will play a crucial role in rejuvenating Abercrombie’s brand image.

Reducing Logo Products can be a Risky Bet

With its fashion doing well and logo business under performing, Abercrombie’s move to discontinue a bulk of its basic products 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 Q2 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. Moreover, as logo products go out and fashion keeps increasing, Abercrombie’s average unit retail will go up, that might prompt buyers to switch to other casual apparel brands. We believe that the retailer’s product portfolio needs to have an optimum proportion of basic as well as fashion products.  Letting customers shift to competitors in search of unavailable affordable basic products would be mistaken.   The company would do best to manage the transition, even as it fosters strong sales in relatively newer and more expensive fashion categories.

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1. Abercrombie & Fitch Names Christos Angelides Brand President Of Abercrombie & Fitch and Abercrombie Kids, Abercrombie & Fitch, Jun 10 2014 [↩]
2. Abercrombie & Fitch’s Q2 fiscal 2014 earnings transcript, Aug 28 2014 [↩]