The clock is ticking on Abercrombie and Fitch Co.'s strategy of selling high-priced teen clothing as the recession erodes sales and profit margins, and competitors outrun it.
The New Albany, Ohio, company, which is expected Friday to report a quarterly loss of seven cents a share excluding charges, has refused to offer deep discounts, allowing lower-priced rivals such as Aeropostale Inc. and American Eagle Outfitters Inc. to build sales and finance attacks on Abercrombie's children's and young adults' sales.
Aeropostale has posted increases in sales at stores open at least a year of 11% and 12% for the first and second quarters of this year. In June, it opened its first P.S. from Aeropostale children's brand store taking aim at Abercrombie's children's clothing.
AbercrombieIn contrast, Abercrombie's high prices have produced 30% sales declines at stores open at least a year in each of the first two quarters.
High prices and a reputation for scantily clad models for years generated some of the best profits in the teen business. But that is no longer the case, said Richard Jaffe, a managing director at brokers Stifel Nicolaus & Co.
From 2002 to 2007, Abercrombie's operating margins hovered slightly below 20%. But last year, Abercrombie's operating margin fell to 13.3% and should fall to just 3.9% this year, said Mr. Jaffe.
Abercrombie Chief Executive Mike Jeffries declined to comment ahead of quarterly earnings. Abercrombie has been reluctant to alter its pricing strategy in part because it believes it is the key to international growth, embodied by its large store in London. The strategy overseas is to sell Hollister clothing as a luxury American brand.
To preserve that air of exclusivity, the London outpost, a tourist magnet, doesn't offer discounts or promotions of any kind. A men's polo shirt that retails for $60 in New York sells for £60 ($99) in the London store, which continues to post year-over-year increases in monthly sales. The company plans to open a large store in Milan in October and in Tokyo in December.
Even so, it has several times embarked on price cuts to move unsold inventories. Abercrombie has insisted the markdowns are highly selective. They are noted subtly by small signs on tables, not the large red signage in store windows deployed by competitors. Even on sale, a typical Abercrombie item often remains pricier than offerings from its peers.
