Abercrombie & Fitch: The 2014 Timeline

Teen apparel retailer Abercrombie & Fitch (NYSE:ANF) has consistently been in the news over the past couple of years, due to its inventory management issues, dismal performance, unwanted controversies, buyout speculations and strategies pertaining the logo business. In this article, we take a look at some of the significant occurrences for the company in 2014.

Early in 2014, Abercrombie made certain tweaks to its management structure after activist investor Engaged Capital demanded the change of the CEO. Soon after, it hired First Insight Inc. to look into its merchandise issues and come up with a viable solution. Later in the year, Abercrombie unveiled plans to open 100 stores in China over the next decade, which was followed by its announcement of a new president for its namesake brand. Soon after, the retailer decided to remove logo products from its portfolio altogether in the wake of poor customer response. In November, Abercrombie announced its entry into Mexico. It’s evident that 2014 was an uneventful year for Abercrombie.

Our price estimate for Abercrombie & Fitch stands at $39, which is about 35% above the current market price.

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January – Limited CEO’s Responsibilities & Eliminated Poison Pill Plan

Early in the year, Abercrombie had decided to relieve CEO Mike Jeffries from his responsibilities as the Chairman of the Board, following persistent pressure from Engaged Capital for the replacement of the CEO. Mr. Jeffries was under a lot of investor pressure, due to his bad PR and failed strategies. At the same time, the company had also added three new deeply experienced members to its board (Arthur C. Martinez, Terry Burman, and Charles R. Perrin). These changes clearly indicated that Abercrombie was looking to address its investors’ concerns with a viable solution. ^[1]

In its letter to Abercrombie’s board, Engaged Capital had suggested the company to put itself up of sale if the CEO was not changed. However, it believed that Mike Jeffries’ presence would be a major roadblock for the public-private transition. Since Mr. Jeffries had a Chairman of the Board above him after the management changes, a financial or a strategic buyer would have found it easier to acquire the company.  However, Abercrombie had quickly terminated its stockholder rights plan, suggesting that it had no intentions of going private. ^[1]

February – Hired First Insight Inc

In February, Abercrombie hired First Insight Inc. to make better informed decisions regarding its products and prices. As a part of the deal, First Insight Inc would leverage online social engagement tools to study consumer preferences, and provide predictive analysis to the company. ^[2] Subsequently, the apparel retailer would have a better knowledge of products and prices that are most likely to be welcomed by fashion and price sensitive teenagers. Abercrombie had started testing new products (in terms of design and prices ) in its stores on weekly basis soon after the announcement. At the time, Abercrombie’s GVP Gillian Galner had said that ” First Insight will be a critical element in the transformative changes to our business”. ^[3] However, given that the customer response to the retailer’s merchandise hasn’t improved much during the year, it appears that First Insight Inc has either failed or its recommendations are still in the test phase.

April – Unveiled Chinese Expansion Plans

Struggling with inventory problems and controversies in the U.S., Abercrombie & Fitch was a little late in realizing that China was a big potential market. While retailers such as Gap Inc (NYSE:GPS) and Guess (NYSE:GES) had tapped the opportunity a long time ago, Abercrombie entered the market in 2011 with three stores and added only four-five stores during the next two years. However, along with the opening of its Shanghai flagship store in April, the company unveiled plans to expand in China with more than 100 stores over the course of next 10 years. ^[4] With its huge population, rising disposable income and booming middle class, China has become a hub for western apparel retailers. Big American brands such as Gap, American Eagle Outfitters (NYSE:AEO) and Guess have ramped up their expansion to take advantage of the growth opportunity. The region provides good potential for luxury as well as value-for-money brands, which makes it a lucrative market for Abercrombie. The retailer’s limited number of stores in the country have performed very well so far, which can continue in the future, provided that it targets the right cities for expansion.

June – Hired a New Brand President

Due to consistent weakness in its namesake brand, Abercrombie had hired Christos Angelides as the president for its Abercrombie & Fitch and abercrombie kids brands in June. ^[5] Mr. Angelides, who had previously worked with Next Plc, took over his role in October and report directly to CEO, Mike Jefferies. He was given the complete responsibilities of product and customer-facing activities for both the brands and will be accountable for their performances going forward. Angelides has immense experience in retailing and his inclusion in the management is expected to bring about some fresh changes to Abercrombie’s struggling brands. However, the decision to remove logo products altogether seems a drastic measure.

August – Decided to Phase Out Logo Products

Over the past few years, U.S. buyers have exhibited tremendous affinity for fashion products, and they have subsequently shown less interest in  basic merchandise from Abercrombie, American Eagle and Aeropostale (NYSE:ARO). During its Q2 earnings call, Abercrombie had stated that while customers were liking its trendy jeans, dresses and skirts, they weren’t showing significant interest in logo t-shirts, shirts and hoodies. The company’s COO, Jonathan E Ramsden, had stated that they have seen tremendous improvement in their non-logo business over the past several quarters. In August, Abercrombie took an aggressive step towards enhancing its fashion content, as it decided to phase out logo products and replace them with fashion-forward merchandise. Mr. Jeffries had stated that the company is looking to reduce its logo portfolio to “practically nothing” by spring next year. 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. This is evident from the retailer’s Q3 results that were weighed down by the absence of logo products from its stores and websites.

November – Announced Mexican Debut

In a November press release, Abercrombie had stated that it has signed a franchise agreement with Grupo AXO to establish a retail network for Abercrombie & Fitch and Hollister brands in the country. ^[6] Founded in 1994, Grupo AXO has built a great reputation for developing brands in the Mexican apparel market. The first Hollister store is scheduled to open in late spring next year  and Abercrombie & Fitch will make its debut in the summer. Although Aeropostale and American Eagle Outfitters had entered Mexico even before Abercrombie announced its expansion, the retailer might not have to face significant competition, given that it already has a customer base in the country. Moreover, in addition to the country’s growing middle class and rising disposable incomes, it has young buyers that have become extremely conscious of international fashion trends, which bodes well for retailers such as Abercrombie. Even though the overall market size still remains small, it has grown steadily over the past and is likely to continue this way in the future.

December – Mike Jeffries Retired

Early in December, Abercrombie’s management issued a press release stating that Mike Jeffries would step down from his positions of the CEO and a member of the Board of Directors effective immediately. ^[7] Alongside, Arthur Martinez, the current non-executive chairman of the board was promoted to executive chairman, and he along with office of the chairman will oversee Abercrombie’s strategies until a new CEO is appointed.

Mike Jeffries’ sudden resignation indicates that the management was under a lot of pressure from investors, who weren’t happy with its leadership. Though was credited with the company’s rise in the 1990s, the retailer witnessed certain expensive failures such as Ruehl and Gilly Hicks brands and the European expansion, during his tenure. Moreover, Mr. Jeffries had been under tremendous scrutiny for some time now, due to controversies surrounding his activities. Since the company’s dismal performance had made investors skeptical about the company, it appears that the top level management and Mike Jeffries mutually decided that it was time for him to step down.

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1. Abercrombie & Fitch Implements Significant Corporate Governance Enhancements, Abercrombie & Fitch, Jan 28 2014 [↩] [↩]
2. First Insight partners retailer Abercrombie & Fitch, Fibre2fashion, Feb 6 2014 [↩]
3. First Insight Announces Partnership with Abercrombie & Fitch, Business Wire, Feb 5 2014 [↩]
4. Abercrombie & Fitch plans over 100 new stores in China, China Daily, Apr 19 2014 [↩]
5. Abercrombie & Fitch Names Christos Angelides Brand President Of Abercrombie & Fitch and Abercrombie Kids, Abercrombie & Fitch, Jun 10 2014 [↩]
6. Abercrombie & Fitch Announces Entry Into Mexico, Abercrombie & Fitch, Nov 21 2014 [↩]
7. Abercrombie & Fitch Co. Announces Senior Leadership Changes, Abercrombie & Fitch, Dec 9 2014 [↩]