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Details on Industry Insight.
Retail sales may have fallen off a cliff, but Abercrombie & Fitch, the owner of surf industry competitor Hollister, refuses to cut prices.
It's a contrarian strategy at the moment and it will be interesting to see how it plays out with so many retailers slashing prices. Even high-end Nordstrom has cut prices and talked repeatedly about providing value for its customers in these times during its conference call last week.
While nearly every retailer is suffering, Abercrombie's third quarter results were especially hard hit because of its lack of promotions. Total company sales fell 8 percent to $896 million and same-store sales fell 14 percent. Net income fell 45 percent to $63.9 million. The company is forecasting same-store sales in the fourth quarter to be down 26 percent.
The company said while it won't cut prices to drive the top line, it is cutting expenses and looking for operating efficiencies. It also said it has enough liquidity to ride out the storm. At the end of the third quarter, Abercrombie had $298 million in cash on its balance sheet.
Here's how Abercrombie CEO Mike Jeffries explained the company's pricing strategy to analysts on an earnings conference call Friday. This is from a transcript on Seeking Alpha.
"In listening to many of you we hear your concerns about how we are dealing with the short-term challenges and the economic downturn. First, let me talk briefly about pricing. We remain committed to our full price strategy. We will not be promotional to drive top line sales. We will use markdowns only to clear through seasonal product in a brand-positive way.
"It is clear to us that the short-term relief provided by the use of promotions is more then offset by the damage inflicted on the brand in the long-term. Promotions are a short-term solution with dreadful long-term effects.
Later, he elaborated on the topic after another question:
"I think being a little promotional becomes being a lot promotional very quickly. We think it is highly destructive to the brand. The issue is not price, the issue for us is fashion. How can we get better and better and better, that's what drives our business and that's our preoccupation."
New stores: The company's first Hollister store in England opened to a great response, the company said.
The store opened with a new look for Hollister that includes multi colored chandeliers and wallpaper. Two more Hollister stores in malls will open in England in the fourth quarter this year, and a fourth is planned to open in early spring. The company is targeting suburban malls for Hollister's international expansion rather than tourist/urban hotspots.
Hollister's flagship in Soho in New York will open in late spring. In total, the company will open 63 new Hollister stores in North America in 2008.
For 2009, the company is focusing on international expansion and scaling back its domestic openings.
Fashion: The company believes it has too many basics in its stores and is missing a fashion component, especially with females. It will be adding more female fashion tops in spring and summer. The company's female business has been suffering, with female comps down in the low 20s.
Moving away from basics and adding fashion is exactly what PacSun has done to boost its female business, a strategy that has worked quite well.