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 own children's clothing.
In 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
To preserve that air of exclusivity, the
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 much pricier than offerings from its peers.
But there are signs it is edging toward deep price cuts. At a San Francisco store in late July, more than 25% of its clothing was on promotion, compared with just 10% a year earlier, according to Ann Poole, an analyst at investment bankers Stephens Inc. Earlier this year, bowing to pressure from Wall Street, the company said it would lower ticketed prices at its Hollister and abercrombie children's brand for spring 2010.
"They don't want to destroy the brand positioning that they have, which is the cool shop in the mall," says Marie Driscoll, a retail analyst at Standard & Poor's Equity Research. "But cool is changing. And part of cool now is value."
The company, which earlier this decade settled suits alleging discrimination against Asian, African-American and female employees, was fined about £9,000 ($14,800) by a British court Thursday for unlawfully dismissing a
Wall Street is pushing Abercrombie to abandon its high prices, which can be double what its competitors charge for similar clothing.
Analyst say the luxury image is failing to resonate with consumers amid the recession.
Some analysts said Abercrombie's luxury-priced strategy delivers stronger cash than its rivals -- despite the sales decline. While cash flow from operations fell 40% last year, to $490.8 million, it far outstripped the $202.1 million generated by Aeropostale. The company ended its fiscal year in January with $
But a year of sharp sales declines could put the company in a precarious position, Stifel Nicolaus's Mr. Jaffe said. He believes the company is trying to ride out the recession, relying on its cash to support the stance.
"The feeling is: We've got the cash, we've got the brand -- the worst thing we could do is act like there's a fire sale," Mr. Jaffe says. "It's not a question of survivability at this point. It's a question of returning to historical levels of viability."
The company has said it is reworking its sourcing arrangements to manufacture less expensively, with plans to pass on those savings to consumers.
But so far prices remain well above rivals. A solid-colored women's polo shirt at Abercrombie currently costs about $50, while the same style at American Eagle is priced at $24.50. Aeropostale has a similar shirt on sale this week for $10.
