Abercrombie, Target Lead Retail's Season of Suffering

One Refuses to Cut Prices, the Other Touts Value; Sales Plunge Regardless

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NEW YORK (AdAge.com) -- Last month proved to be the worst November for retailers in at least 39 years, according to the International Council of Shopping Centers. Still, terrible results from Abercrombie & Fitch and Target stood out, even amid the sea of grim reports, providing case studies of marketing approaches that are simply not resonating with consumers in these dire times.

In the case of Abercrombie & Fitch, a refusal to partake in promotions and discounts has caused sales to drop at an alarming rate.

"In a deflationary environment, where all consumers are looking for is the next promotion, running a full-price business ... is just not working," said Robert Samuels, executive director at Oppenheimer & Co., regarding the retailer's approach. "In an environment where people are looking for the best deal around, Abercrombie isn't even on the radar."

'Tragic' fall
In June, sales at stores open at least a year declined a relatively modest 3%, but by September they were down 14%. In November, sales at the teen retailer plummeted 28%. Competitors Aeropostale and American Eagle reported comparatively modest declines of 5% and 11%, respectively, in November. Mr. Samuels expects double-digit sales declines will become the norm for Abercrombie & Fitch, as he doesn't believe it will adjust its strategy.

The retailer, which operates the Abercrombie & Fitch, Hollister, Ruehl and Gilly Hicks stores, did not return calls for comment.

Abercrombie & Fitch's performance, described by one analyst as "tragic," is notable for its rapid deterioration, as the retailer has failed to adjust to the current promotional environment. But analysts say promoting is just not a part of its DNA. In the past, that has served the retailer well, as it built its reputation as an aspirational teen hot spot and delivered positive results to Wall Street. But now, with the nation in recession, Abercrombie & Fitch is grappling with a dilemma facing many marketers.

"They're backed into a corner. You don't want to be promotional, if it hurts the brand. And it would erode the track record they have of not having promotions," said Laura Champine, managing director at Cowen and Co. "But if you're going to stick to that, you better have hot product, and their product is pretty stale."

Several other analysts also noted the retailer's lack of innovation and fashion must-haves. Indeed, its shelves are stocked with traditional button-downs, hooded sweatshirts and chunky wool sweaters. None of which offers a point of differentiation from competitors.

Ms. Champine said the retailer will soon need to find ways to clear inventory. She suggested a "Friends & Family" promotion -- something high-end retailers like Saks Fifth Avenue have employed -- as a way to quietly promote without undermining the brand.

Several analysts also said that, although Abercrombie & Fitch has yet to make any significant announcements about cost cutting, one is likely on the horizon. Ms. Champine said she would not be surprised to see a pullback in advertising.

Target's message ineffective
Sales at Target, meanwhile, continued to deteriorate. It seems the more the cheap-chic retailer touts its value message, the further sales fall. Dan Binder, an analyst with Jefferies & Co., said he brought up that very point to the retailer. "They said it may take some time to resonate with the customer," he said, adding that he expects Target will continue to focus on value.

Target began an aggressive campaign this summer to tout value, shifting its focus to the "Pay Less" portion of its "Expect More. Pay Less." tagline. It has also been vocal about its efforts to bring prices in line with competitor Wal-Mart. But despite its best efforts, sales have steadily declined. In June, same-store sales were flat. By September sales were down 3%, and in November, sales declined 10%. By contrast, Wal-Mart posted a 6% increase in June, a 2% increase in September and a 3% increase in November.

Gregg Steinhafel, president-CEO of Target, admitted sales in November were worse than the retailer had expected. "Results from post-Thanksgiving holiday sales, particularly Friday, were stronger than the rest of the month but were insufficient to offset earlier weakness," he said.

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