Abercrombie & Fitch (NYSE: ANF ) recently offered to pay a certain hard-partying reality-show star to stop wearing its clothes, claiming his patronage sends the wrong message. News outlets quickly and correctly vilified the company for its public relations stunt. But look beyond the flash and gimmicks, and you'll see a company continuing to perform well, despite -- or perhaps because -- it's not afraid to play fast and loose with its image.
Why A&F works for customers
Abercrombie made its unusual pitch to Mike "The Situation" Sorrentino of MTV's Jersey Shore, a show known for its fights, casual sex, and excessive drinking. The offer is not the company's first media stunt, and it probably won't be the last. A&F has often drawn loud criticism for its daring and frequently tasteless tactics:
- Some critics particularly pan Abercrombie's imaginary backstories for each of its brands. For instance, its Gilly Hicks intimate apparel brand claims to be Australian (the first store opened in Massachusetts), based on an actual woman (not even close) and established in 1932 (2008).
- In 2009, the company faced lawsuits from minorities who claimed they weren't hired, or were forced to work in the stock room, because they didn't fit the Abercrombie image.
- Most recently, the company's 2011 pre-teen clothing line included a padded bikini bra, a move that outraged many of the people who weren't already previously outraged.
- And for a company that supposedly sells clothing, you'll see a lot of nearly naked teenagers throughout Abercrombie's marketing imagery. In 2003, the company issued a catalog with a cover that conservatives claimed depicted and encouraged teen group sex.
Indeed, the company's gotten embroiled in so many image fiascos that my attempt to conduct an Internet search for "Abercrombie scandal" required me to be more specific.
But all these controversies have accomplished an important goal. They've kept the various Abercrombie brands on the front pages, and built the company a reputation for being a little edgy, bucking the politically correct system, and perhaps most importantly, pissing off parents.
Why it works for investors
Love Abercrombie or hate it, the company's results are undeniable. Its second-quarter earnings (announced mid-August) included a 23% increase in sales. U.S. sales climbed 12%, while international sales rose 74%, to $231.9 million. Web and catalog sales for all brands increased 28% to $102.1 million.
Overall, the company reported growth in comparable-store sales, or comps -- a prime indicator of a retail outlet's success. The flagship Abercrombie & Fitch enjoyed a 5% increase in comps; Abercrombie kids saw 7%; and Hollister booked 12%. Not all the company efforts have proved so successful; citing economic reasons, Abercrombie shuttered its six-year old Ruehl brand at the beginning of 2010.
As a frame of reference, rival Urban Outfitters (Nasdaq: URBN ) can't compare to Abercrombie's gross margin, managing 45.3% over the last year versus A&F's 63.9%. Gap (NYSE: GPS ) has twice A&F's market cap and a wider diversification of brands, including Old Navy and Banana Republic. Yet it reported lower trailing earnings over the past year, plus a gross margin that narrowed to just 39% amid the higher cost of doing business.
Will A&F work for you?
Abercrombie may be the one stock in your portfolio that makes you roll your eyes. Its commitment to aggressive international expansion could have huge payouts, or be an equally huge disaster. The Gilly Hicks brand remains relatively new, and for all we know, it might be the next Ruehl.
However, shutting down the Ruehl brand means that Abercrombie can admit that something isn't working. That's a strong indicator of a company willing to try new things and learn from its mistakes. Better yet, this seemingly irresponsible company actually pays a consistent dividend.
Yes, Abercrombie may be obnoxious, but you can't get more obnoxious than the cast of Jersey Shore, and viewers have been tuning in for that show in droves for four seasons now. If you find Abercrombie's antics similarly amusing, you just might end up laughing all the way to the bank.
Fool contributor Molly McCluskey doesn't own stock or positions in any of the companies mentioned. The Motley Fool owns shares of Gap. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.