Abercrombie Calls Off Sale Process, Doubts About Turnaround Remain

July 11, 2017

What’s next for Abercrombie & Fitch Co., now that the former teen favorite and Wall Street darling from years ago decided it would rather go it alone than sell itself at a low valuation?

Nowhere at the moment. That’s because the company, which has since lost touch with its core Abercrombie customer, is still trying to figure out what it needs to be to resonate with the consumer. And even though management is working on new product, and plans to expand its new brand concept store to several locations, nothing seems to definitively resonate yet with either the slightly older Millennial crowd or the notoriously fickle teen consumer.

Much to the dismay of investors, the company said Monday that its board of directors has ended talks with several parties over a possible acquisition of the retailer, which also owns the Hollister chain. Executive chairman Arthur Martinez said the board has “determined that the best path to enhance value for stockholders is the rigorous execution of our business plan.”

 

That investors weren’t happy is an understatement — they sent shares of Abercrombie down 21.1 percent to $9.59 in Big Board trading on Monday. It’s also a sign of investors’ lack of confidence in the turnaround if they thought their best hope for a return would be the sale of the company.

Abercrombie is at a difficult crossroads. Its heyday was about 20 years ago when former chief executive officer Mike Jeffries — he was recruited in 1992 by Leslie Wexner, chairman and ceo of L Brands, which then owned Abercrombie — catapulted the name from what was a small safari outfitter into a cool, hip brand through creative and controversial marketing campaigns. Even though moms were up in arms about the photos of nude or seminude teenage children, the kids rushed to grab the quarterly copy of Abercrombie’s magalog, and bought the clothes — much of it featured logos then — as a sign of rebellion.

But declines in the teen space, lackluster sales of apparel with logos and a teen segment where sex no longer sells contributed to sales declines at the brand. Jeffries’ lavish spending and the stock’s poor performance led to his departure in December 2014, although the company spun it as part of retirement planning.

And while Jeffries’ departure was needed at the time, so far Abercrombie still is searching for how to get its mojo back.

In May, the company posted first-quarter results for the period ended April 29 that saw net losses of $61.7 million, or 91 cents a diluted share, on net sales of $661.1 million. Comps at Abercrombie were down 10 percent, although up 3 percent at sister brand Hollister. Fran Horowitz, the current ceo at Abercrombie, said the company expects improvement in the second half when it will be able to see returns from its strategic investments in marketing and omnichannel.

But second-quarter trends suggest the turnaround could take longer. According to sources, credit card receipts for purchases at the stores have not picked up, suggesting either that the brand is no longer on customers’ radar or that they go into the stores but walk out without buying. That kind of selling trend doesn’t lend confidence to investors trying to find data to confirm expectations for future growth projections. And while Abercrombie touts increased buying online, most consumers still do their buying at the store.

Telsey Advisory Group’s Dana Telsey said recent comp trends at Abercrombie “highlight the difficulty in repositioning the brand under a new apparel and fashion dynamic.”

Jefferies analyst Randal J. Konik pointed to another problem: That any interest by potential acquirers of the retailer during negotiations “eventually dissipated when realizing merger benefits like the elimination of overhead costs would likely be offset by time and resources needed to right the ship at Abercrombie.”

Early on in the sale process, which was first disclosed by Abercrombie in May, several possible buyers had expressed interest in the company. American Eagle Outfitters Inc., Abercrombie’s competitor down the mall, was taking a close look, sources told WWD, and subsequently had considered joining forces with Cerberus for a bid. Express Inc. was another strategic that was said to be among the potential bidders. More recently, Sycamore Partners was identified as an interested party, although it later elected to buy Staples Inc. for $6.9 billion.

Analyst Jane Hali, ceo of Jane Hali & Associates, said, “Abercrombie tried to appeal to a contemporary audience without the right merchandise or change in retail.” She said if the retailer wants to reach a new consumer base they say they are targeting, the company would need new product, contemporary influencers and an updated store environment, all of which are lacking.

“Most of the styles they are selling wouldn’t appeal to a 25-year-old. The fit fits a teen [consumer], and the atmosphere in the store is lacking,” she said, adding that Abercrombie is not on the teen radar because of other options, such as sister brand Hollister, and the fast fashion brands H&M and Forever 21.

Gabriella Santaniello, founder of fashion and retail research firm A Line Partners, said of the proposed sale of the retailer: “Nobody wants to pay up when the issue is that there’s no confidence that the company can actually turn around operations. Obviously Hollister is gaining momentum, but at the end of the day, Abercrombie is not.”

While Santaniello didn’t want to rule out the possibility of a turnaround, she noted that the company has a “very long, hard road ahead.” She cited price points that are still higher than those of its competitors at the mall, but for what she called “generic” product.

“The merchandise needs to be a little bit more stylish; it has to have some personality, some identity. In trying to take away the sexy aspect of the clothing, they’ve made it really dull,” Santaniello said. She also said that in changing the focus to a slightly older consumer, Abercrombie “abandoned the current customer, then realized it’s not so easy to get customers.”

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