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A&F’s New Turnaround Strategy: Change Everything; It’s Not Working

Teen retailer Abercrombie and Fitch (A&F) is looking to revitalize its slumping sales with a basket of strategies that includes dramatic cost-cutting measures, store closings and a new emphasis on cyber retail. However, increased competition in North America from fast fashion clothiers and a loss of relevancy among its core consumers both paint a bleak picture of the company’s future prospects.

The challenges confronting A&F are considerable. According to a report issued by the Cowen Group, a financial services firm, A&F’s major problems are a lack of store traffic and rapidly declining productivity. For the third quarter in the U.S, the company experienced a 14 percent decline in same-store sales. And, there is no respite from its troubles in sight. According to the report, A&F’s international sales will likely plummet another 25 percent, despite the advantages gained by a significantly weaker euro. And while the industry consensus is that its 2014 earnings-per-share will land at $3.10, Cowen pegs the number at a much more modest $2.25.

A&F’s cost-trimming strategy seems to hinge on the closure of stores in the U.S., a reemphasis on its sales in Europe and a shift from brick-and-mortar sales to click-and-order cyber retail. Since 2009, it has shuttered 170 retail storefronts in the U.S. A&F’s senior vice president for global real estate, David Leino, said, “The rationale for this is very obvious. The continued shift to customer spending online will make this necessary, especially in underperforming malls.”

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John Kernan, CFA at the Cowen group, noted the limitations of shifting business online as the centerpiece of a turnaround strategy. “There’s only so much you can accomplish solely on the basis of omnichannel shifts. Ultimately, any successful sales model requires a product your targeted consumer wants.”

Another problem with A&F’s strategy is that cost-cutting is inherently limited as a springboard to future growth. According to the Cowen Group report, it could even lead to “further deterioration in international sales productivity.” If the retailer’s management chooses to cut its payroll, marketing and general and administrative expenses, the brand’s support overseas might ultimately suffer as a consequence.

Also, while A&F plans to make a big push into the Middle East and Asia, it’s not clear that it can shake its sullied reputation in the U.S. Wendy Liebman, CEO of WSL Strategic Retail, said, “There is an opportunity there. The problem is that if you don’t have a successful brand at home, going global isn’t going to save you. People go online. They’re going to see the backstory.”

The Cowen Group study also noted, another problem for A&F’s global expansion is that its “international sales productivity may be unsustainable.” Both Hollister and Abercrombie are losing share in the U.K. and lower price points are eating away at its gross margins. International sales productivity is down a staggering 35 percent since 2011.

Additionally, an increasingly competitive North American market is compelling A&F to resort to aggressive discounting, further pinching the retailer’s already winnowed margins. And the competitive field is only becoming more populated with rising rivals. “H&M recently launched its U.S. e-commerce business, while Old Navy’s product turnaround is notable and we expect Forever 21, Uniqlo, and competitive pressures from niche-eCommerce retailers and Amazon within clothing and accessories,” the report said.

In an effort to move more business online, A&F is partnering with First Insight Inc. (FI), a technology company known for consulting with retailers regarding product investment and pricing decisions. The firm will use its extensive online social media tools to study consumer preferences and establish more accurate predictive models for A&F. Under FI’s tutelage, A&F will be testing new products on a weekly basis, monitoring customer feedback and focusing on the infamously fickle teen consumer. Gillian Galner, GVP of A&F, said, “By using First Insight to identify more winning products and price them appropriately, we are increasing speed to market with the right styles which will yield increases in sales and margin.”

Craig Brommers, Director for Marketing at A&F, said, “I think we have to take the strongest part of our brand DNA and evolve it to be more relevant to a younger generation of consumers. We don’t think this is a drastic repositioning, but we are very aware we need to evolve our brands. But we also know that teens are willing to spend a little more on quality staple items, such as denim, flannels, and outerwear.”

Kernan expressed skepticism that A&F could regain its lost relevancy among teen shoppers. “Teens aren’t the most loyal of shoppers and A&F has squandered much of the premium positioning it once had with that demographic.”

In fact, A&F has floundered so badly among teen consumers it has begun to shift its sales strategy to an older consumer demographic, looking to attract college-aged shoppers. Chief operating officer and chief financial officer Jonathan Ramsden said that the retailer will begin to offer new product lines that appeal to a more mature sensibility.“It’s part of wanting to separate the brands more, take Abercrombie to more of a premium, with Hollister as more fast- fashion,” he said. “It’s an opportunity to connect Abercrombie & Fitch with its heritage and move it up in demographic.”

In an effort to recapture some of the luster among teens the brand has lost, A&F is now exploring the possibility of selling third-party products in its stores. CEO Mike Jeffries said that tough times compel the the company to investigate opportunities “outside of the confines of our existing vertical specialty retail model.” He continued, ““We have a long list of additional collaborations in the works, across footwear, apparel and accessories, which we are excited to launch in the coming months.” And although A&F is only in the nascent stages of considering such a move, many believe it intends to sell other brands aggressively as a “positioning device,” which means the move is an attempt to redeem its name by association.

In response to A&F’s slumping performance, the retailer’s board ousted Jeffries from his position as chairman of the company. Arthur Martinez, formerly the top executive of Sears, was named Jeffries’ replacement. Jeffries will remain CEO of the company.

Jeffries recently came under fire both for his stewardship of the company and for a series of public relations gaffes. Last year, he said that Abercrombie & Fitch only intended its clothing to be worn by “cool kids,” a statement that was interpreted as a condescending snub of many teen shoppers. The retailer has also weathered persistent criticism that it neglects to offer larger sizes for women, further reinforcing the perception of its elitist exclusion of many consumers.

Only two months ago, Engaged Capital LLC pushed Abercrombie & Fitch to force Jeffries to relinquish his spot on the board or to sell itself off. Tensions between the retailer and disgruntled investors reached such a fevered pitch that the company entertained the possibility of resorting to a “poison pill” in order to prevent a hostile takeover. It recently announced it will not avail itself of such a drastic measure.