Hip retailer Abercrombie & Fitch Co. suffered dismal November sales results last week, and one reason may be a bold tactic that is backfiring: while rivals are aggressively slashing prices to battle the weak economy, Abercrombie has refused to join the rush to discount.Teen retailer American Eagle Outfitters Inc. had a buy-one-get-one-half-price sale this month for all its tops; Quiksilver Inc. marked down $50 shorts to $30; Aeropostale Inc. slashed some prices 70%. But Abercrombie's gray polo shirt is selling for $60, not much less than it did 18 months ago, when teenagers were still flocking to the mall.
Markdowns are the knee-jerk reaction of most retailers when inventories pile up and demand drops. But they can unleash an avalanche of problems. The hefty margins that fuel these companies' growth can vanish. Even when the economy picks up, troubles can linger as established brands find it difficult to regain pricing power and appeal.
Traditionally, only the very upper crust of the luxury market has been able to hold firm in tight times. This year, however, brands from Chanel to Versace have let their prices slip by as much as 10% in an effort to make up for sagging sales.
That's left Abercrombie, which made its name marketing preppy chic, largely alone in following its own strategy for dealing with the downturn -- more or less ignoring it. The company is pushing forward with an aggressive overseas expansion. It has kept inventory stock at similar levels to those before the slump. And it says under no conditions will it reduce its prices for customers any more than usual.
Wall Street has begun to question the soundness of Abercrombie's no-discount pledge. The stock has tumbled nearly 80% from its January high of around $80, in part because of the pricing strategy. Some analysts now rate the stock a "sell."
"We hear your concerns," said Chairman and Chief Executive Michael Jeffries in an earnings call with analysts last month, but "promotions are a short-term solution with dreadful long-term effects." Marking down clothes now could lead to the brand being seen as something cheap, he explained.
Even in good times, Abercrombie has always shied away from big promotions, though it does try to clear out merchandise at the end of a season. The company's determination to keep prices high as the economy sours has already cost it dearly during the holiday season, which accounts for an estimated 30% of total teen retail sales.
Last week Abercrombie reported that November sales in stores open more than a year dived nearly 28% from the year before, significantly worse than at competitors who discounted. Pacific Sunwear of California Inc. said same-store sales fell 10%, while American Eagle's same-store sales slid 11%.
These sales figures, however, mask a problem for the discounting stores: falling margins. Gross margins at American Eagle slid 6.4 percentage points to 41% of sales in the third quarter, while at Pacific Sunwear they fell 4.9 percentage points to 28.7% of sales. Abercrombie, meanwhile, closed the quarter with relatively high gross margins of 66% of sales, with a much smaller decline of 0.2 percentage point.
Abercrombie resisted discounting in 2001, when a downturn sent consumer spending crashing. As competitors slashed prices, Abercrombie actually raised them on some items. But the 2001 recession lasted eight months. The current recession is already in its 12th month. The longer it lasts, the more pressure Abercrombie will come under to relent on prices.
"The worry here is at a certain point they have to cry 'uncle' and capitulate on the pricing," says Kimberly Greenberger, an analyst at Citi Investment Research, adding that the company might rethink its strategy if the recession continued more than 18 more months. Still, Ms. Greenberger, who recently upgraded her own "sell" rating to a "hold," says she appreciates the management's "very long patience in being able to tolerate negative sales" even if its immediate benefit to investors is murky.
Abercrombie's general counsel, David Cupps, says the company is "well positioned to deal with a tough market," adding that cutting prices would be cutting the quality of merchandise. "We're not going to follow the promotional pied piper," he says.
But as more competitors cut, consumers are becoming accustomed to getting clothes on the cheap. So far, Abercrombie has differentiated itself from its competitors by delivering a unique atmosphere in its brick-and-mortar stores, which feature dark, nightclub lighting, along with racy ads where the women are young and men go topless. Yet the store's image isn't enough to lure Megan Tysoe, 20, who says she and her friends skip Abercrombie for cheaper chains like Forever 21 and H&M. "Some of my roommates' parents have decreased their allowances," causing less spending, she says.
Abercrombie is betting that those outside the U.S. feel differently. In the next year it plans to open six stores in places like Milan and Copenhagen, which will complement its fleet of 22 U.S.-based "tourist" stores catering to foreign visitors in places like Las Vegas and New York.
