Today's earnings report from Abercrombie & Fitch (NYSE: ANF) makes clear what all clothing retailers ought to take to heart: Stick to what you know and stop trying to be all things to everyone.
The teen retailer reported a 3% increase in profits for the first quarter as net income grew to $62.1 million, or $0.69 a share. Revenue was also up 8%, while same-store sales at flagship stores rose 3% over last year. But as fast as its models strip down in its racy online videos, comps at the Ruehl segment dropped 17%.
Although it makes up only a small portion of Abercrombie's total operations, that was the most notable drop among its brands. Hollister's same-store sales fell 8%, and the abercrombie kids line was down 7% for the quarter. Its new undergarments store, Gilly Hicks, set up to compete with The Limited's (NYSE: LTD) Victoria's Secret, hasn't been around long enough to have comps. But judging by the numbers from its current operations, I wouldn't set expectations too high.
The problem with retailers is that they're broadening their offerings to touch every consumer rather than sticking with their core audience. We saw this from rival teen retailer Pacific Sunwear (Nasdaq: PSUN), which began an urban-wear chain of stores that undoubtedly never caught on because it lacked any "street cred." Thankfully, PacSun's new CEO saw the light and shut down the stores. She decided to stick to selling surf, skate, and board clothing to teens. It's a smart move and should pay off for investors, of which I'm one.
Abercrombie, on the other hand, hasn't learned that lesson yet. Ruehl, and to a lesser extent Gilly Hicks, if only because it's newer, seems to have a lack of focus. Revenue doubled in Ruehl's first full year of operations, but rose by only 50% last year. That might sound good, but that's only because eight stores were added. Comps actually fell 9% from the year before. Now same-store sales are tumbling even more.
Sure, the economy's worsening, but it's also because Abercrombie is a teen retailer. It doesn't resonate the same with adults despite the fact that the company wants to carry them from their preteen years (Abercrombie) through their teens and early adult years (ANF, Hollister) and on into maturity (Ruehl).
The Gap (NYSE: GPS) learned that lesson the hard way when it tried to capture the same demographic with its Forth & Towne brand -- it quickly conceded defeat last year. And the fall of Chico's FAS' (NYSE: CHS) stock is often blamed on management's acquisition of White House | Black Market, a bizarre concept that focuses on black and white fashion for women.
So why Gilly Hicks, which purports to be the "cheeky cousin from Sydney, Australia"?
Do one thing and do it well is a motto retailers should remember. Particularly when an economy is in decline, spreading yourself like too little butter over toast simply leaves investors with a crummy taste in their mouths.
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