Abercrombie & Fitch has spent the better part of two decades being one of America's hottest brands.
It might as well have a trademark on six-pack abs in advertising; its strategy of using sex to sell the preppy look to teenagers has been a gigantic success, and it's all thanks to CEO Michael Jeffries and his infamous refusal to compromise on style, pricing and branding.
However, Abercrombie & Fitch has a cyclical problem. When recessions happen, Jeffries refuses to compromise his premium pricing. A&F has thus seen its sales decline while competitors like Aéropostale post consecutive quarters of growth. For many, the idea of Abercrombie continuing with its current strategy in these economic conditions is insane, and the numbers are beginning to back up the doubters.
Abercrombie has also had mixed results in innovating new brands. There was Hollister (success), but there was also Ruehl (failure).
Now, coming off perhaps the worst year since 1977 when the 114 year-old company declared bankruptcy, people are wondering whether Jeffries, the man who made Abercrombie an iconic American brand, can stay in the CEO's office much longer.
It all started in 1892.
David. T. Abercrombie opened Abercrombie & Co. in 1892 and by 1904, Ezra Fitch, one of the store's biggest customers, became a partner in the Manhattan store. By the time the Great Depression arrived, it was the largest sporting goods store in the country. Unfortunately, things turned sour in the 1960s and it went bankrupt in 1977.
In 1988, The Limited purchased the struggling store and decided it was time to get out of the sporting goods business. Michael Jeffries, who previously led women's retailer Paul Harris, was hired to lead Abercrombie as CEO 1992. In 1996 an IPO was offered and by 1996 the company was independent from The Limited.
Jeffries figured out sex sells.
Jeffries quickly rebranded A&F to focus on young, hip people. A&F describes itself as a "luxury" brand, but it's not made to compete with top fashion houses. Rather it's positioned above Gap in pricing and quality. The target customers are the "popular kids" in high school, according to Jeffries.
And there's sex. Lots of sex.
In 2003, after a few complaints about various ads sexy, the National Coalition for the Protection of Children & Families, a Christian group, launched a protest of A&F's "Christmas Field Guide." They took issue with a cache of images featuring models in various stages of undress, sex acts including "group sex and more" on the cover, and editorials about threesomes, sexual experimentation and masturbation.
The group was specifically upset because A&F's target audience is under-age.
In 2000, Hollister, a sub-brand, was launched.
Hollister was A&F's answer to brands like Aéropostale, Wet Seal, and American Eagle's increased competition. Its target market is younger, around 14-18, with lower prices and more conservative styles than the flagship A&F.
It was a major success for the company. By Q2 2011, Hollister sales in outpaced Abercrombie by a wide margin.
In 2002, it upset the Asian community with racist T-shirts.
In 2002, A&F released various T-shirts depicting stereotyped illustrations of Asians. Asian-Americans protested, forcing Abercrombie to apologize and pull the shirts.
Amongst the slogans were:
- Wong Brothers Laundry Service. 555-Wong. Too Wongs Can Make It White. Abercrombie & Fitch.
- Wok-N-Bowl. Let The Good Times Roll. Abercrombie and Fitch. Chinese Food & Bowling.
- Abercrombie 's Pizza Dojo. You Love Long Time. Eat In Or Wok Out. Call Us 1-555-GOO-PEZA.
A year later, lawsuits alleging racism at the company began stacking up.
Multiple lawsuits were filed against A&F regarding its alleged racist hiring practices. Plaintiffs in each case claimed they were more than qualified to work at Abercrombie, but were turned away because of the color of their skin.
One report described A&F as "the Fourth Reich in flip-flops," a reference to Abercrombie's preference for tan, tall blondes. In the Summer 2003 catalog, 67 of 68 female models were white, and only four out of a hundred or so in the back-to-school version, were non-white.
In 2005, A&F settled a class action suit for $50 million. It agreed to benchmark hiring numbers and other measures aimed at trying to ensure diversity.
While Abercrombie has been better about adding some diversity to its campaigns, as in this ad, suits over hiring practice continue, and the racial mixture is still largely white. In 2010, Morley Safer covered the topic for 60 Minutes.
By 2004, Aéropostale was a serious threat.
Aéropostale and Abercrombie compete for the same demographics. Julian Geiger, chairman and former CEO of Aéropostale, chose to undercut A&F. For instance, it:
- Discounts products, offers sales and promotions, all in contrast to A&F.
- Targets the "pre-teen" demographic with slightly lower prices for younger customers.
- The sexiness is toned down — partly for the customers' parents.
- Focuses on females much more than males.
- Does not try to create fashion trends. Aéropostale believes people just want to fit in, so it will sell designs on their way out, capitalizing on those who still need to fit in.
This strategy has paid off in a big way. In 2002, Aéropostale went public amid three years of average sales growth of 88 percent annually, and by 2004 it had reached a market cap of $1.3 billion and it was the top retailer on Businessweek's Hot List.
'Are we exclusionary? Absolutely.'
In 2006, Jeffries agreed to cooperate for lengthy profile in Salon. It produced a variety of quotable material from the company's head, none of which was more controversial than his thoughts on Abercrombie's target audience:
In every school there are the cool and popular kids, and then there are the not-so-cool kids... Candidly, we go after the cool kids. We go after the attractive all-American kid with a great attitude and a lot of friends. A lot of people don’t belong [in our clothes], and they can’t belong. Are we exclusionary? Absolutely. Those companies that are in trouble are trying to target everybody: young, old, fat, skinny. But then you become totally vanilla. You don’t alienate anybody, but you don’t excite anybody, either.
But investors didn't care—sales were booming.
Despite the competition and the controversies, A&F was booming. In 2007, it booked $3.75 billion in revenue and posted a net profit of $475.7 million.
By 2008, Jeffries' compensation topped $70 million.
Jeffries compensation in 2008 was $71.8 million according to Time, which would have been enough to place him third on the AP's Highest Paid CEOs for 2008. In addition, Jeffries racked up $1.1 million in private jet fees in 2008, leading Abercrombie to pay him not to fly the jet in 2010.
With the stock tanking, Citi blasted its 'lack of innovation' in September.
After an awful August 2008, analyst Kimberly Greenberger went off on A&F's pricing and "lack of innovation." In downgrading the stock, which had dropped 30 percent in a three-month period, Citi acknowledged it made a mistake with their previous "buy" rating.
The whole oncoming recession thing didn't help either.
A&F responded by continuing its long-standing policy of not discounting.
With the stock tumbling, Jeffries was asked why he wouldn't discount. He replied, "promotions are a short-term solution with dreadful long-term effects."
The stock would close down 80 percent for 2008 for a variety of reasons: the global economic downturn, decreased consumer spending and analyst concerns over Abercrombie's long-term strategy, particularly its refusal to adapt its pricing structure in the midst of a recession.
It didn't help that teens were turning to H&M and Forever 21, both fast-fashion discounters. American Eagle, A&F's main competitor, discounted items at a rapid pace in order to keep customers coming in the door.
Jeffries kept the margins the same and protected the brand, but he paid the price.
In June 2008, Jeffries announced his pricey Ruehl experiment would close by the end of the year.
Ruehl was supposed to be Abercrombie's brand for the post-college consumer. It had its own retail shops were twenty-somethings could look at edgy t-shirts and other high-end goods. It launched in 2004 with the highest prices in the A&F family and never caught on.
In June, Jeffries admitted it was time for the New York-inspired stores to go:
It has been a difficult decision to close RUEHL, a brand we continue to believe could have been successful in different circumstances. However, given the current economic environment, we believe it is in the best interests of the Company to focus its efforts and resources on the growth opportunities afforded by our other brands, particularly internationally. While I am disappointed with the ultimate outcome, I am grateful for the effort and commitment the RUEHL team has shown in developing and positioning that brand in the marketplace. In particular, the recent strides made in differentiating and elevating the RUEHL assortment make this an especially difficult decision. However, all of our brands will benefit from our experience and lessons learned with RUEHL.
By August 2009, no one understood the strategy at A&F.
In August of 2009, Time magazine ran a story entitled, Abercrombie & Fitch: Worst Recession Brand?
- Even if you aren't going to discount, you need to run promotions. Keep the price of jeans the same, but give a free hat or something. When things get better, take away the hat promotion—no degradation of the brand through discounting and better sales.
- Tenth straight month of double-digit sales decline, this time 30% company-wide.
- Abercrombie admitted they missed some of the spring fashion trends.
- Q2 profits declined 134%, competitor Aéropostale was up 83%
But, Q3 2009 numbers were better and A&F had a 'solution' to the problem.
While same-store sales fell 22 percent across the company, A&F beat expectations. Analysts suddenly displayed a renewed confidence in Abercrombie and suddenly things were looking up. Furthermore, Jeffries had a solution for the economic downturn, go global.
On the Q3 call, A&F announced it would move forward with increased global expansion, something that was welcomed by investors as shares rose 6 percent.
But 2010 was better and things were looking up by Q3.
In the all-important retail month of December, Aéropostale posted 12 percent same-store growth, A&F? Down 24 percent, but it rebounded in 2010.
The 2010 Q3 numbers were good, not great. International sales were doing well, but it wasn't 2007 all over again. Aéropostale and American Eagle were still big problems in the domestic market, but perhaps the brand protection strategy had survived a recession.
2011 got off to a rocky start with record cotton prices.
The entire fashion industry got bad news when cotton prices hit ridiculous highs in the beginning of 2011. How high did they get?
That would be above Civil War prices.
The $2 a pound threshold mark was crossed thanks to bans in India, flooding, poor performance in Pakistan, and China's growing demand. Cotton has traded below $1 a pound consistently over the past few decades.
It kicked off spring 2011 by selling push-up bikinis to third graders.
In March of 2011, Abercrombie Kids, the division whose target is 8-14 year-olds, began selling push-up bikini tops. Parents and child development experts didn't like it. Abercrombie tried to rebrand the $25 top as "padded," but eventually scrapped the product altogether.
When summer came, it asked its most famous customer to stop supporting the brand.
A&F launched a campaign against the Abercrombie-obsessed Mike "The Situation" Sorrentino of MTV's Jersey Shore. It claimed that he was destroying the integrity of the brand publicly and then offered to pay him to not wear its clothing.
This came a year after it embraced his celebrity status by offering "The Fitchuation" shirts.
The Q3 2011 numbers were a disaster.
After years of promising success on international sales and struggling U.S. sales, Abercrombie beat domestic forecasts, but reported negative numbers in Asian and Europe. Domestic locations open longer than a year were up 7 percent, but it didn't matter.
Shares would fall 22 percent on Nov. 3. Adrienne Tennant, a managing director at Janney Capital Markets, told Reuters, "We choose to move to the sidelines until it is proven that the international growth strategy is as robust and promising as we had earlier believed."
By contrast, Aéropostale reported a 9 percent drop in same-store sales for the quarter and saw its shares rise 18 percent. However, American Eagle Outfitters, which operates fewer stores and sells cheaper goods compared to Abercrombie, was the biggest benefactor of A&F's abysmal 2011.
ANF would enter December 2011 trading at below $48 a share, having lost over 35 percent of its value in November alone and now, a few months later, its market cap ($3.7 billion) is currently a billion dollars greater than Abercrombie's.
And Europe is not getting any better.
Its preliminary Q4 numbers showed the banking on Asia and Europe strategy was still not working and the Q1 2012 numbers weren't anymore promising internationally. Furthermore, same-store sales were supposed to decline by 0.5 percent, but instead declined 5 percent. Net sales also missed, although not at the same scale.
Once again, A&F is in deep waters.
A&F kicked off the summer with shorts that were really underwear.
This time it was Hollister and shorts with a two-inch inseam—and they were $35. Girls complained they weren't going to be able to fit into them.
The "short short fit" shorts are still on sale.
The, er, icing on the cake: A&F was named in a sexual harassment suit involving a male model.
In June 2012, model Ben Bowers claimed agent Brian Hilburn forced him to masturbate for an A&F shoot. Bowers' $1 million suit alleges Hilburn told him he needed to looked relaxed, and that the shot they needed was him immediately after he finished. Bowers obliged and then claims Hilburn stripped to compare body parts with him.
Abercrombie isn't the only clothing store struggling with strategy right now ...
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