Abercrombie & Fitch turns to price cuts, outlets to escape its own hot mess

March 4, 2015, 7:06 PM UTC
Photograph by Chris Ratcliffe — Bloomberg via Getty Images

“That wasn’t too painful,” Abercrombie & Fitch Chief Operating Officer Jonathan Ramsden could be overheard saying to his colleagues at the end of the earnings conference call on Wednesday, apparently unaware his mic was still hot.

Unfortunately, the same could not be said for Abercrombie’s fourth quarter results—they were plenty painful. And while there were some positive signs—its gross profit margin rose because A&F was careful about not ordering too much, less it have to mark it all down later—it is clear there is plenty left to do.

Comparable sales (sales at stores open at least a year combined with online sales) fell 10%, a performance the company admitted was “somewhat below expectations,” with its Hollister brand’s disastrous European performance accounting for a big chunk of its problems.

It is still looking for a new CEO (Mike Jeffries, who built up the A&F empire over 20 years but fell asleep at the wheel, left at the height of the 2014 holiday season), enduring the hit to sales from its decision last year to be less logo-driven, and slowing shrinking its store base.

Here are some of the key takeaways from the conference call about its strategy to get itself out a mess of its own making:

1. Expect more U.S. store closings

Abercrombie has closed a total of 275 U.S. stores since 2010, with more to come. Lucky for the company, some 70% of its leases expire within three years, making it easier for it to shrink its store fleet, focusing on better locations and re-infusing the ubiquitous brand with some semblance of rarity. (It expects to close 60 stores this year, mostly by letting expiring leases lapse.)

2. But expect more outlet stores

One of the few bright spots in Abercrombie’s paltry results were strong performance at its outlet stores, prompting the company to plan to open 11 new such locations. It’s a far cry from the day this retailer was so hot it would never deign to offer discounts with its strong pricing power. But comparable sales at the outlets stores were up 20% last quarter, so it’s easy to see why it’s tempting.

3. Hollister is a bomb in Europe—so it will cut prices

The biggest drag on A&F’s performance last quarter was Europe. Specifically its surfer brand Hollister. Same store sales fell 20% last quarter internationally, with much of traceable to this problem. (And in a rare feat in this day of e-commerce ascendancy, A&F managed to see online sales fall 5% internationally, with fewer people coming to its stores.) So now Hollister will roll out lower process across all of its European stores.

4. Pain from ditching logos to continue this year

The retailer that built a highly profitable empire hocking Abercrombie & Fitch-emblazoned T-shirts and hoodies at steep prices is set to be logo-free in North America by spring. But it will feel the pinch of it for a good part of 2015. The goal is for logo-ed merchandise to go from mid-to-high 20’s of total sales in percentage terms to low-to-mid teens. Tough to walk away from a big chunk of your business—but a wise one given how little young ones care about names anymore. Besides, the company sales last quarter were actually positive for non-logo merch.

5. Moving to a new compensation scheme for managers

Abercrombie will now start an incentive plan for store managers and district managers to give them a greater stake in the performance of their stores. It may seem basic, but it may spur a bit more effort from stores that for years just drew shoppers naturally.

The company won’t give any precise sales and profit forecasts for 2015 until its business stabilizes. But it’s clear A&F’s pain will continue for much of the year.

“The critical objective is to arrest the comp (comparable sales) decline in both our U.S. and international stores,” Executive Chairman Arthur Martinez told Wall Street.

For now the company is betting on these steps to help it in that direction.

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