Embattled Abercrombie hoping size will matter

Zac Bissonnette, Special to
Abercrombie and Fitch models
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This has been one tough year for Abercrombie & Fitch.

A megaviral "Abercrombie-Hates-Fat-People" meme started in May when a Business Insider piece analyzed Abercrombie's marketing practices and included a 7-year-old quotation from CEO Mike Jeffries.

The piece then piled on with comments from a retail consultant with no connection to the company who explained that A&F didn't sell plus-sizes because Jeffries didn't want overweight people wearing his clothes. Social media outrage ensued, and a YouTube video urging consumers to donate their Abercrombie clothes to homeless people for a "brand readjustment" garnered more than 8 million views.

That might have been enough to make it a tough year. But the retailer's operating results and stock market performance have also fallen off a cliff. In a November presentation, the company reported its seventh consecutive quarter of declining same store sales, cut its earnings forecast by more than half, and announced that it would close its Gilly Hicks-branded lingerie stores.

But it also countered its earlier negative press by announcing it would be offering larger sizes, particularly for women. It is all part of an effort by the retailer to reinvent itself.

The November presentation, however, drew even more skepticism. Analyst Dorothy Lakner of Topeka Capital Markets, who has the stock rated a hold, called it "very scary."

"My impression was that these were all admirable goals but that they were a day late and a dollar short," she said. "There were many initiatives that they discussed that other companies have been working on for years. It was Retailing 101; it was that basic."

(Read more: Should Abercrombie's CEO be year's worst?)

What's more, Abercrombie's financials have helped its case. Net sales for the third quarter were down 12 percent; comparable store sales were down 14 percent in the U.S. and 15 percent internationally, offset by an 11 percent gain in catalog and online sales.The stock is down almost 30 percent year to date, versus a gain of more than 41 percent for Standard & Poor's retail index. To be fair, shares of Aeropostale and American Eagle Outfitters, the company's two most direct competitors, are both down more than 21 percent.

Robin Lewis, the industry consultant whose analysis of Jeffries' aesthetic led to the spring brouhaha, said that isn't much of a consolation. It suggests that Abercrombie isn't losing market share to similarly situated but lower-priced competitors because of temporary price-consciousness—as happened during the recession. Rather, the company's target demographic is shifting to something entirely different, and the perception of the brand as intolerant is symptomatic of that. As the company noted in November, the conformity of Gen-X has given way to a different aesthetic that Abercrombie is still trying to understand.

"They're in more trouble than perhaps people realize," Lewis said. "Young, sexy, and cool has to be defined by those who are young, sexy, and cool. The 18-24-year-olds are the people who are defining this. They are looking for something a little dressier, a little more fashionista—and they don't want to wear the same outfits their friends are wearing. That's why H&M and Zara, with new lines every two weeks, are doing so well." Still, Jeffries was granted a new contract recently, giving him more time to turn around the retailer.

(Read more: Abercrombie rejects shareholder call; extends CEO contract)

Abercrombie: Worst CEO contender?
Abercrombie: Worst CEO contender?

At the analyst meeting in November, the company discussed its recent strategic review—the most comprehensive such effort in the company's history—and outlined plans to increase variety and re-engage consumers—especially women, who, the company noted, have been the driver of declines in the U.S. business.

Front and center was a plan to offer larger sizes, but if Abercrombie thought that would be a big win with the media, it was wrong: "A Desperate Abercrombie Will Stop Shunning Plus-Size Shoppers" was a Huffington Post headline, and the Daily Telegraph's deputy women's editor went with this for a headline: "Dear Abercrombie & Fitch, is 'larger sizes' all you've got to win women back? You'll need to try harder than that."

But putting aside the sizing announcement, observers were mostly unimpressed by the presentation.

Abercrombie has been too slow to add accessories to its stores, said Topeka Capital's Lakner, blaming that on an "element of rigidity" in management that has made it slow to react to most industry changes. She said the company has historically done relatively little testing with consumers—which worked when it was able to dictate fashions. But it's been unable to do that lately.

CNBC's Jim Cramer recently placed Jeffries on the "Mad Money" Wall of Shame, saying Abercrombie had become "practically irrelevant." Meanwhile, Engaged Capital, a hedge fund with a 0.5 percent stake in the retailer, released a letter on Dec. 3 calling for a change in management: "We are confident that an independent and objective evaluation of management's performance would result in the conclusion that an immediate leadership change is necessary," it said.

Abercrombie, on the other hand, said it has been responsive to changing trends—but that as an established brand, it has to be careful about not undermining the image that made it a classic. "The sense of urgency that we are tackling our initiatives with right now is at a very high level," A&F executive vice president of marketing Craig Brommers said. "We're testing and reacting to lots of different things but at the same time we have these iconic brands and we need to make sure that we don't overreact."

Brommers says Abercrombie can meet demand shifts without radically remaking its image—which has, since Jeffries began resurrecting the brand from the retail dustbin in 1992, remained mostly the same. One of Jeffries' first moves was to hire photographer Bruce Weber to create the classic, New England prep school aesthetic he had in mind. The company was so strapped for cash that it couldn't afford a full photo shoot, so it settled for one photo that it would hang in all its stores. That look became the foundation for the company's image—which, in a more diverse, politically correct era, seems to be at best failing to interest consumers and at worst enraging them.

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"There are certain trends that are happening now that we feel like we have a unique brand handwriting that we can use to look at," Brommers says, citing the '90s grunge look as an example. "We feel that we can address the needs of that trend but do it through a brand-appropriate lens."

So far though, that doesn't seem to have happened—and Abercrombie finds itself in a position not that different from the one the Gap was in a few years ago.

"The Gap brand has reinvented itself so many times. A&F has been going a long time without reinvention, and I think flexibility is something they probably need," said Lakner. The doubt among analysts and investors, it seems, is about whether Jeffries, who so magnificently reinvented the brand in the 1990s, is the one to do it again.

—By Zac Bissonnette, special to Follow him on Twitter @ZacBissonnette.