The West Towne Mall in Madison, Wis., is bustling with young shoppers on Saturday afternoon, but at one retailer there's plenty of elbow room: Abercrombie & Fitch (ANF ) Co. As 1 p.m. approaches, only four customers are in the store, and two of them are heading out the door empty-handed. "You can buy two pair of jeans elsewhere for the $60 you pay here for one," gripes Chris Budzin, 20, as he makes his exit with girlfriend Jayne Vosen, 18.
A few years ago, Abercrombie's high prices were as much a part of its cachet among free-spending teens as its preppy styles and racy marketing. Then the economy soured, and high prices became a turnoff to cost-conscious kids. To keep the registers ringing, such rivals as American Eagle Outfitters (AEOS ) Inc. and department stores have discounted aggressively. Abercrombie chose to take the high road, eschewing promotions to preserve the brand's exclusivity and lofty margins -- the highest of any teen retailer.
That reflects a discipline that lots of other marketers -- are any Detroit carmakers listening? -- seem to have forgotten. But critics say Abercrombie Chief Executive Officer Michael Jeffries hasn't given kids a good enough reason to pay top dollar. As Abercrombie enters its fourth year of mostly declining sales, it may be time to question whether Jeffries' noble experiment is panning out. Even as most retailers benefited from a surprisingly strong back-to-school season, Abercrombie reported on Sept. 4 that sales at stores open at least a year plummeted 11% in August.
Although Jeffries declined to be interviewed by BusinessWeek, he has assured analysts that sales will rebound when the economy does, and that keeping the Abercrombie brand "aspirational" is the best way to maintain profits. Otherwise, he reasons, you train your consumers to expect discounts. Jeffries says he has updated Abercrombie's preppy fashion look with low-rise jeans and sexy knit tops. And he says that Hollister (ANF ) Co., the 3-year-old surf-inspired division that now accounts for 113 of Abercrombie's 625 stores, is off to a fast start, though the jury is out on how much it will cannibalize sales.
Abercrombie's rich profit margins kept skeptics at bay until recently. Under Jeffries, who arrived in 1992 after spending much of his career at Federated Department Stores (FD ) Inc., Abercrombie exercised tight cost and inventory controls. And, of course, Abercrombie has long commanded big markups -- a hooded sweatshirt sets a shopper back $69.50, vs. $39.50 for a similar item at American Eagle. The result: Abercrombie's $313 million in operating profits came to a hefty 20% of its $1.6 billion sales in the fiscal year ended January 2003.
At some point, though, those margins will shrink if sales keep sliding. Abercrombie still is identified with an edgy collegiate look and logo shirts that took the teen market by storm in the second half of the 1990s. But teenage girls want more extreme styles like punk, says Irma Zandl, president of Zandl Group, a New York teen market research firm. That's how rivals Pacific Sunwear (PSUN ), Urban Outfitters (URBN ) and Aeropostale (ARO ) have kept growing even while holding the line on discounting. "He [Jeffries] happens to be off trend," Zandl says.
Clearly the market has shifted on Abercrombie. The question is, can Jeffries respond? Some analysts fear that customers fleeing Abercrombie for low-priced rivals won't be back. Says Marshall Cohen, chief analyst at market research firm NPD Group Inc.: "This is the first generation of teens [in years] that has been trained to purchase on a budget." When even kids have learned how to pinch a penny, the time may have arrived for Jeffries to change course. His profits are impressive, but they won't hold up forever if customers keep voting with their feet.
By Robert Berner in Madison, Wis.