It's the Friday before Labor Day weekend. With kids and their parents soaking up the last rays of summer, the
, about 30 minutes north of New York City, is tomblike. Stores look cavernous without the typical throng of shoppers. There's one exception:
Abercrombie & Fitch
Even though this particular Abercrombie store looks more like a throwback to its roots (complete with plaid carpeting and antler-inspired lighting fixtures) than the frat-house icon it's become, customers are five-deep at the register. Founded in 1892 as a sporting-goods store, the chain clothed such American icons as
bought it in 1988. Michael Jeffries joined as chief executive in 1992 and has since transformed the brand into a poster child for collegiate cool. A spinoff established Abercrombie as an independent company last year.
Customers' arms are loaded down with everything from T-shirts bearing the company's new testosterone-laden wrestling theme to "paratroops," cargo pants made from cotton and nylon with a rich parachute-like texture.
The pants, which sell for $59.50, are already sold out on Abercrombie's
Web site, which began allowing customers this fall to make purchases, in addition to absorbing the Abercrombie "lifestyle." Mainly, that lifestyle revolves around buff-looking, shirtless young men. More buff-looking men can be seen in the company's first-ever television commercials, which aired Thursday night during the
MTV Video Music Awards
and, subsequently, during the
Tom Green Show
, also on MTV, and the season premiere of
ANF looks even busier compared with its next door neighbor,
, the young men's chain owned by the Limited. No one is browsing, much less buying at Structure even though two racks of pants are marked down to $10.99 from $49.99 -- ouch! That lack of traffic is even more striking considering that Structure is borrowing a few looks out of Abercrombie's book like a wall of baseball hats with curled brims.
There are no cotton/poly blends at Abercrombie & Fitch, where all-wool sweaters cost more than what any minimum-wage-earning (or allowance-collecting) kid takes home in a week.
"Quality is increasing and price is decreasing in importance for apparel shoppers," says Todd Slater, an analyst with Abercrombie underwriter
, who rates the stock a buy.
The soft spot, however, continues to be with the ladies. Is it any wonder that Abercrombie is struggling to come to terms with its more feminine side, when the walls are plastered with giant posters of sweaty guys bearing the tag line "Wrestling: Guys Get Hurt, Guys Get Bloody, Guys Get In Fights."
"Women's has underperformed for a long time," admits spokesman Lonnie Fogel. While other retailers that sell to both sexes generate a majority of revenue from women's clothing, Abercrombie reported that women's clothing accounted for $367 million in sales in its latest year ended Jan. 30. That's less than half of the $816 million in sales Abercrombie reported for the year.
Jeffries, the CEO, will be playing a closer role in the development of both men's and women's wear since the company streamlined operations when it
reassigned the merchandising heads of men's and women's apparel to special projects.
"Mike decided he didn't need to have the extra layer of management between himself and the merchandise team," Fogel says.
Jeffries, while respected for his ability to consistently hit home with fickle teens, is perhaps equally loved on Wall Street for his financial discipline.
"Abercrombie has some of the best financial ratios in the industry," notes Slater, the analyst. Abercrombie tops competitors
American Eagle Outfitters
when it comes to sales per square foot, inventory turns and return on investment.
A common saying around the company's Reynoldsburg, Ohio offices is "shake and bake." "That means we can make decisions quickly," Fogel says. For instance, instead of flowing in a season's offerings in one shot, the company will ship a few items into stores early and then reorder those that sell. That prevents Abercrombie from getting stuck with buckets of unsold goods.
"We're more interested in protecting the brand for the long term than we are in capturing the very last dollar of sales," Fogel says.
That strategy won the company kudos on the Street until the fiscal first quarter, when inventory appeared to have ballooned. Despite management's explanation that spring merchandise was shipped to stores earlier this year than last, investors punished the stock by trimming nearly $1 billion from its market value since July. Friday, Abercrombie shares were up 1 5/16, or 3.4%, at 39 7/8, giving the company a market capitalization of $4.1 billion.
In reality, Abercrombie's inventory was actually lean, Slater argues. He says Abercrombie and American Eagle carried roughly the same amount of inventory in the period, yet Abercrombie's sales outpaced its competitor by $40 million. Further proving that rising inventory was more a one-time blip than a troublesome trend, Abercrombie's inventory in the second quarter ended July 31 grew at a slower rate than sales.
Yet Abercrombie's stock has yet to recover from its earlier bruising. Fears of interest-rate hikes are still dampening demand for retailers. And momentum investors, who piled into the stock for its hyper same-store sales growth, have been trimming positions as the company has warned that sales at stores open at least a year will slow.
Still, Slater, the analyst, points out that the stock is trading at a discount to its earnings growth rate even though the company says it can meet analysts' estimates, which call for a 39% jump in earnings this fiscal year on 6% same-store sales growth. That's why Slater considers Abercrombie "one of the best buys in the market."
Back-to-school shoppers seem to agree.