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Discounting Spells Doom for Abercrombie & Fitch, Gap

The once-mighty Abercrombie & Fitch toned down its provocative ad campaigns in an effort to appeal to more consumers, but one of the world’s leading financial firms said it can’t shake its biggest problem.

In a research note issued to investors Friday, Credit Suisse wrote that Abercrombie (ANF) is stuck in a death spiral of discounting and reiterated its “sell” rating. San Francisco-based Gap Inc. (GPS), which recently reported a 2 percent decline in same-store sales in the second quarter, is also knee-deep in this dilemma.

“The Gap and Abercrombie had the highest levels of discounting in our pricing check, as it appears both companies continue to rely on heavy promotional activity to drive consumer demand,” research analysts wrote, according to Business Insider. “Gap’s out-the-door price was 31 percent lower than the full price, and Abercrombie’s out-the-door price was 25 percent lower than full price.”

In fact, during a back-to-school price check, Credit Suisse found that both company’s discounting levels were higher than the average discount of 13 percent. Moreover, they reduced prices by an average of 50 percent per month over the past year and a half.

However, a research note published by Eric Beder of Wunderlich Securities pinned Abercrombie’s poor performance (and, thus, the need to lower prices to push product) on its new image, which focuses less on mall-going teens and more on 18- to 25-year-olds.

“While the shift to an older customer is a strategy for Abercrombie, we see limited reasons for older customers to shift back to a ‘teen’ brand and, frankly, there are better brands and lifestyles for the 20-plus customer to focus on,” read Beder’s note, quoted by Business Insider.

Abercrombie & Fitch is scheduled to release its second-quarter earnings Tuesday. The company’s share price was down 14.26% year-to-date Monday morning, while Gap’s was up 7.49%.