Abercrombie & Fitch Changing Its Long Standing Strategies

In an unrelenting retail environment, U.S. buyers have been severe on Abercrombie & Fitch (NYSE:ANF), which was a prime name in the industry a decade ago. Mike Jeffries took over his role as the CEO of the company in 1992 and transformed the brand into somewhat of an exclusive club for attractive teenagers. Within the first two years of his tenure, Abercrombie’s sales doubled to $165 million and five years later, the figure reached $1 billion. Abercrombie’s logo became extremely popular among youngsters, who regarded the brand as a “must have” for their wardrobe. During his tenure, Mike Jeffries employed several strategies  that worked very well at that time, but have lately contributed to the company’s downfall.

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

See our complete analysis for Abercrombie & Fitch

What It Used To Do

There was a time when Abercrombie’s logo on basic t-shirts and jeans was enough to attract customers, but it is no longer the case. Over the past two to three years, U.S. shoppers have shown great interest in fashion-forward products from Zara, Forever 21 and H&M, but little affinity towards logo branded basic products from Abercrombie. As a result, the company’s revenues have declined significantly, since it persistently relied on logo business hoping that its iconic brand image would eventually bring customers back.

Mike Jeffries’ strategy of not offering XL, XXL and sizes over 10 for women, and his “cool kids” comments were actually aimed at keeping the brand exclusive for its target audience. While it worked very well initially, the company faced significant media criticism a couple of years back after this strategy was highlighted negatively. After Jeffries’ and the company’s image took a hit, some investors singled out the CEO for some of his failed strategies and held him responsible for Abercrombie’s weak performance.

For the better part of the last decade, Abercrombie sold apparel with shirtless male models for in-store staff. While this was a strategy to create a unique shopping environment, the biased hiring process got the human rights involved. It was reportedly stated that Abercrombie’s in-store staff did not include professional models, but individuals who had applied for regular retail jobs and were given a dress code that did not include a shirt. In 2013, France’s official human rights watchdog began investigating the company’s hiring procedure in the country.

And Now

It appears that Abercrombie has finally realized that what it used to do, will no longer help it attract customers. In fact, it will continue to deter the company’s image and sales. As U.S. buyers have shunned basic logo products altogether irrespective of the brand, Abercrombie has decided to aggressively transition its portfolio from basic logo products to non-logo fashion products. Last year in an earnings announcement, the management stated that they will reduce their logo business to “almost nothing” within 12 months and replace it with fashion-forward inventory. Although the change appears too drastic, we believe that this was a much needed step. Indeed, this will result in significant revenue decline in the near term, but Abercrombie’s sales were falling rapidly even without this strategy. However, with this transition, the company stands a better chance of improving in the current retail environment, where only fast-fashion brands are thriving.

Abercrombie’s strategy of not having plus-sized clothes in its portfolio resulted in significant negative publicity. In response, the retailer announced in late 2013 that it will start offering plus sizes for some of its women’s clothes in 2014. This was clearly a move intended to salvage the brand image and expand the customer base. However, even a year after the inclusion of plus sized clothes for some of the categories, there has not been any change in the financial performance. The company may have to add plus sizes across the board in order to see a notable impact on its growth.

Abercrombie’s advertisements and models have offended parents for too long, becoming a part of several controversies surrounding the company and Mike Jeffries. However, now the retailer has decided to put shirts on its previously shirtless male models, as a small part of its ongoing efforts to reinvent itself. While we do not expect Abercrombie & Fitch to completely come of its slump in the near future, it will certainly be doing things a lot differently in 2015. A better product portfolio, new leadership and new strategies can help it regain some of its lost brand value, which can subsequently bolster sales growth.

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