Summary
While Investors at Abercrombie & Fitch have sounded the alarm about Chief Executive Michael Jeffries’ stubborn position not to run sales promotions in the midst of the worst retail environment in decades and the brands poor merchandising strategy, have contributed to the company’s disastrous performance in 2008. The recent extension of Jeffries employment contract as CEO of the company for another five years has industry experts and stockholders scratching their heads in disbelief.
Analysis
___________________________________________________________Those of us who read the Sports Section of our local newspapers are no longer shocked to hear stories about the over the hill ballplayer (who can no longer pull the fastball, or score from second on a base hit) get signed to a huge contract on the hope that his long lost skills will magically return. The financial pages never fail to entertain with stories of failed CEO’s who, somehow, are able to hang on to their jobs, or get royally rewarded with huge payouts for poor performance. So it should come as no shock to investors that the board of Abercrombie & Fitch saw fit to reward the totally inflexible Michael Jeffries with five more years at the helm of his listing ship.
Back in 1992, when he first was hired by Limited Brands to revive the brand, Jeffries successfully set the tone with his over the top “sex sells” imagery, targeting college students who were willing to overpay for jeans and jeans related products, just to take part in the Abercrombie & Fitch brand phenomena. As I survey shoppers in the teen and low twenties demographic, I typically hear sentiments that the assortment is “off-trend, repetitive and overpriced.” This reaction from consumers and resulting poor store comps (-28% in November and -24% in December) has been going on for at least two years and has only been exacerbated by Jeffries refusal, during the recent retail collapse, to promote new merchandise in season.
The heart of the problem at this juncture is out of touch design and merchandising at both Hollister and Abercrombie & Fitch and a bizarre store shopping experience, featuring dark sales floors and shuttered windows. With the entire retail world (including the top luxury retailers and brands) promoting fiercely to free up cash and keep market share, Mr. Jeffries seems to believe that any hint of promotional activity in his stores or online (such as free shipping) will tarnish A&F’s aspirational teen luxury positioning forever and mortgage future growth.
Unfortunately, his customers are finding greener pastures for value and hip fashion at stores such as Urban Outfitters, Aeropostale, Forever Twenty One, H&M, American Apparel, Guess and Buckle – and it will likely take more than a picture of a body building teen age boy to get them back in the fold once the retail climate improves. The company has targeted the fashion capitals of Europe and Asia for expansion with more flagship stores at Abercrombie & Fitch and smaller mall locations for Hollister. Both brands still have a great sexy upscale image in global markets, a major success factor – if only the product would live up to the hype. Unfortunately, the merchandise today in both brands is highly overpriced, off- trend, repetitious and boring. Mr. Jeffries himself oversees design and merchandising and until he sends a new mantra to his team, focused on his customers need for value and fresh compelling fashion, the global outlook for success is bleak - and it’s unlikely that that he will fulfill the full term of his new five year contract. The paramount strategic focus at Abercrombie & Fitch Inc. must shift from achieving a once attained 20% operating margin, to getting back some of their lost market share by enticing full price shoppers back in their stores with exciting products and prices that make sense in the new retail landscape.
