Abercrombie banking on Hollister surfwear to keep it afloat

July 11, 2017, 9:26am

As consumers go, so goes the U.S. economy. And consumers are increasingly going online.

That’s been a major headache for brick-and-mortar retail chains lately, with Abercrombie & Fitch the latest major casualty. On Monday, the youth-oriented clothing retailer canceled its plan to sell itself off — apparently because it couldn’t find anyone willing to meet the asking price.

Following the announcement, Abercrombie shares plummeted 21 percent to 17-year lows Monday, dragging other retailers along for the day’s hellish ride.

Some key points to remember:

  • Abercrombie sales have fallen for four straight years. Its Hollister surfwear brand has been a bright spot, however. The company said Monday it will now focus attention there.
  • According to census data, e-commerce in the U.S. grew 14.7 percent in the first quarter, almost triple the rate of growth in retail overall. Online sales are still a relatively small part of the pie — just 8.5 percent of total sales. But the concern for incumbent retailers is that the fast growth in the digital sector will eventually overtake brick-and-mortar stores altogether.
  • Of several potential bidders, the private-equity firm Sycamore Partners, which recently bought Staples for $6.9 billion, came the closest to buying Abercrombie. But it ultimately backed off, Reuters reported.
  • Wall Street is skeptical of Abercrombie’s efforts to shift its focus from teens to college-age consumers. The younger cohort is increasingly drawn to chains like Zara and H&M that specialize in low-cost, rapidly produced “fast fashion.”

In March, the bond-rating agency Moody’s downgraded Abercrombie’s debt to “junk” status. “In our view, Abercrombie is unlikely to achieve strong earnings improvement in the next one to two years,” Moody’s analysts wrote.

They noted that although Abercrombie was trying to cut costs, those cuts wouldn’t necessarily guarantee fatter profits because of heavy pressure to offer low prices — one reason why Abercrombie’s turnaround is “a difficult task.”

In theory, a buyer with a ton of cash would have given Abercrombie a better chance to succeed at that tough assignment. Now the company will have to make a go of it on its own. And judging by the reaction of the stock market, investors don’t like its chances.