A&F’s Makeover Mode: Chain’s New Concept May Chase Older Crowd

NEW YORK — Abercrombie & Fitch has remade its catalogue. Now it wants to remake its audience.

Beginning next month, A&F launches a new chain to start chasing another crowd, a customer that has maybe shopped A&F for years but has grown up, graduated from college, seeks more sophisticated styles and may be turned off by the A&F brand after years of loyalty.

The first four test stores of the start-up chain, dubbed internally Concept Four, will be launched in different parts of the country to measure reaction from a cross section of the population. A fifth door will open in early 2005.

The strategy, which some sources speculate could attempt to compete with J. Crew and Banana Republic price points but with hipper looks that underprice contemporary brands, is being kept tightly under wraps. The company declined to provide any specifics for competitive reasons.

“When you test stores, you want to spread them out across the country so you can get unbiased data,” said a source close to the company. The source also said the new concept would be “aspirational.”

With A&F’s highly regarded Hollister division — launched in 2000 and catering to 14- to 17-year-olds, rather than the 18- to 22-year-old set that A&F division targets — the company conducted roughly a 12-month, six-store test, with units including locations such as the Mall of America in Bloomington, Minn.; the Mall of Georgia in Atlanta; Paramus Park, N.J., as well as malls in Easton, Ohio, and Kansas City.

The upcoming division for an older crowd is expected to follow a similar strategy of testing a handful of units in different regions of the country for about a year, before reaching a verdict and more aggressively rolling out stores.

The new division is being run by Carole Kerner, considered a strong, creative merchant with a range of experience at high-profile brands, who was instrumental in launching Hollister.

“She is a phenomenal merchant because she generates an original idea no matter where she has worked. She’s great,” said Elaine Hughes, of E.A. Hughes & Company executive search. “She has a unique combination of abilities to understand where the trends are going, regardless of the age, demographic or price point, understanding what’s hip, and beyond envisioning the next trend, she knows how to develop and execute to that trend. It’s one thing to have a great idea. It’s another to translate it to a salable product.”

Kerner is a former president of Donna Karan and DKNY Women, and previously served as senior vice president and general merchandise manager of women’s apparel at J. Crew’s mail order business. WWD reported in 1998 that Kerner “successfully repositioned women’s apparel as the dominant force in J. Crew’s mail order business.” Kerner also served as president of Calvin Klein Women’s Sport in addition to holding several posts at Warnaco. She began her career at Macy’s New York.

There are several reasons for launching a new division. The core A&F brand, retail sources said Monday, has been hampered by products that are high-priced, imagery that became overtly sexual and possibly frightened off too many prospective customers, and increased competition offering an overabundance of similarly styled casual sportswear.

Also, the A&F brand is almost maxed out on expansion, with 360 stores operating and a ceiling of 400 units envisioned by the company. But the firm isn’t giving up on the A&F division. It’s just trying to repair it by revamping the merchandising strategy and pushing into higher price points while eliminating promotions to differentiate from other brands.

Despite its difficulties with the core A&F brand, analysts have said that there is still sufficient equity in it to command higher prices and pull away from the mainstream, like Gap and American Eagle, and could have a hipper brand extension that’s not as expensive as some cool contemporary brands, like Juicy Couture.

Yet the road to more immediate growth seems to be via the five-year-old Hollister division. It has a long way to go before maxing out on expansion, and is performing better than the A&F chain. Hollister has 192 units and as many as 600 to 800 are contemplated.

According to Seth Johnson, executive vice president and chief operating officer, the company intends to open 85 Hollister stores this year.

“Our analysis has implied that Hollister would be of sufficient size to begin driving the total company comps in 2005,” said Goldman Sachs analyst Margaret Mager in a past review of the retailer’s earnings.

The third growth vehicle is abercrombie, targeting seven- to 14-year-olds, which has 171 units operating and a ceiling of 400 envisioned by the company, but that chain hasn’t created as much buzz as Hollister.

One specialty retail source questioned whether talent the caliber of Kerner should be used to start up another chain, or to fix the A&F business. The company’s poor comparable-store sales performance in recent months has been largely attributable to the core A&F concept. The trend was apparent in June with A&F experiencing an 8 percent decline in comps. Both men’s and women's clothing tracked in negative territory for the month. According to J.P. Morgan Securities analyst Brian Tunick, the number of transactions was down 18 percent at A&F stores.

Hollister, however, posted an 8 percent comp increase in June.

“I think we were able to move a little more quickly in the Hollister business than we were in the A&F business to be in the trending classifications,” said Mike Jeffries, chairman and chief executive of Abercrombie & Fitch, in a response to analysts’ questions during a conference call. “This business is moving faster than it ever has before, and we had to just get our team up to get to the right pace of business. It happened slowly during the quarter, but we really saw the impact of newness at the end of the first quarter.”

While Hollister has overshadowed A&F lately, and is even said to be cannibalizing sales from its sister A&F division, analysts are not deeply troubled by the company’s performance or future, expecting to see a rebound in July sales figures. “We look for steady comp improvements beginning in July as the company benefits from new merchandise initiatives including the introduction of the premium-price Ezra Fitch line,” said SG Cowen analyst Lauren Levitan. The line will include leather jackets, priced at $390, cashmere sweaters, $178, velvet blazers, $200, and washed denims, around $125.

Analysts have also acknowledged that promotional activity was intentionally kept low, a move that negatively impacted comps, but ultimately saved margins and earnings.

One retail consultant raised another concern: “There’s been no succession planning.” While Kerner is highly regarded for having a rare combination of skill sets, the analyst noted that she has never been singularly involved in running a $1 billion corporation.

Others also point out that Abercrombie has curiously never had “a flagship mentality” unlike other chains that fight to get retail space on high-profile streets like Madison or Fifth Avenues. In Manhattan, for example, there are no Hollister stores and only one A&F store, located in the South Street Seaport. According to the source close to the company, it’s possible A&F one day will reconsider its real estate.

Meanwhile, the company has reconsidered its catalogue. Last December, the A&F Quarterly was discontinued. It had featured nude models and triggered protests and possibly was partly responsible for declining sales. Analysts praised the cancellation at the time, saying they hoped the retailer would instead focus on its core product problems, rather than sensationalism. The magalogue was relaunched earlier this month as A&F Magazine, with some pictures of hunks nude to the hip bones, but nothing as racy as in the past.

— With contributions by Ross Tucker

Abercrombie & Fitch By the Numbers
Most Recent Quarter vs. Prior Period
Sales: $411.9 million vs. $346.7 million	+18.8 percent
Earnings: $29.7 million vs. $25.6 million	+16.1 percent
Trailing 12 Months vs. Prior Period
Sales: $1.77 billion vs. $1.63 billion	+8.8 percent
Earnings: $209.2 million vs. $197.2 million	+6.1 percent
Same-Store Sales, Last Four Quarters
Q1:	Flat
Q4:	-11.0 percent
Q3:	-9.0 percent
Q2:	-8.0 percent
SOURCE: COMPANY REPORTS