Abercrombie Slump Exacerbated by Out of Touch Targeting?

Last week, Abercrombie & Fitch (NYSE: ANF) posted a disappointing third-quarter earnings report, earning $0.57 per share as opposed to the expected $0.71, which caused a sharp decline in their share price. ^[1] Though sales increased overall in both the flagship and the secondary brand stores, a spike in cotton prices over the summer caused major costing issues for Abercrombie and it’s competitors such as Aeropostale (NYSE:ARO), American Eagle (NYSE:AEO) and Gap (NYSE:GPS).

Abercrombie’s Rich Portrayal

However, while their competitors boasted of low prices and offered discounts, Abercrombie seems to have gone in the opposite direction and focused their marketing campaign on being “privileged” and “elite”. While Abercrombie has traditionally been positioning itself as an upscale luxury brand targeted to the upper middle class teens, its current extremely overt campaign may end up backfiring. ^[2]

With the current economic downturn, their traditional target market is shrinking fast and those who do remain are on the look out for deals offered by sites such as Groupon (NASDAQ:GRPN) or Living Social. The Occupy Wall Street movement is throwing a starkly negative light on the type of “rich” lifestyle that Abercrombie is trying to sell and a majority of Americans sympathize with their arguments. By positioning themselves as a purveyor of luxury, without the cushion of upscale customers that true luxury brands such as Gucci and Armani command, Abercrombie may have trouble maintaining sales revenue.

Strong Online Presence Bolsters Closing Stores

Despite the closure of an additional 60 stores in the US and disappointing sales in Europe, Abercrombie’s solid direct-to-consumer growth of 41% worldwide ^[3] confirms the strength of the company’s focus.

While ANF’s online business currently only accounts for 22% of the stock price, according to Trefis Analysis, even a slight increase could have a noticeable impact on the stock’s valuation.

Trefis analysis values Abercrombie stock at $64.13, a 40% premium over the current market price of $45.94.

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This article was submitted as part of our Trefis Contributors program and may not reflect the views of Trefis analysts. Email us at contributors@trefis.com if you’re interested in participating.

1. Abercrombie & Fitch Plunges After Q3 EPS Miss, iStockAnalyst [↩]
2. Abercrombie: Give Me Your Privileged, Your Elite, Your Huddled Ivy Leaguers Yearning to Look Rich, Minyanville [↩]
3. Abercrombie & Fitch Slump Overdone, The Street [↩]