American Apparel recently filed for bankruptcy after years of declining sales, rising debt, and soaring legal costs from a battle with its ousted founder. A decline in mall traffic and the rise of "cheap chic" fashion retailers like H&M, Forever 21, and Zara left American Apparel, which sold pricier clothes made in the U.S., in the dust. Other iconic apparel retailers from the past -- including Wet Seal, Deb Shops, and Delia's -- also recently filed for bankruptcy. Teen apparel retailer Aeropostale could join that list soon.
Source: American Apparel.
Another retailer in a precarious position is Abercrombie & Fitch (ANF 7.26%). The company, which lost about 40% of its market value over the past year, has a lot in common with American Apparel. Will those common weaknesses bring it to its knees, or can the ailing retailer still be saved?
Birds of a feather ...
American Apparel and Abercrombie & Fitch both have trouble stepping out of the shadows of their former leaders. When Dov Charney founded American Apparel in 1989, he used sexually provocative ads, tight clothing, and retro designs to grow its brand among young customers. Similarly, Mike Jeffries employed similar strategies to turn Abercrombie & Fitch from an aging upscale sporting goods and apparel retailer into a premium teen brand. Both strategies worked well throughout the 1990s.
Unfortunately for both companies, tastes in fashion change. Today, younger shoppers are turned off by Abercrombie & Fitch's heavily branded apparel and high price tags. In Piper Jaffray's most recent seasonal teen spending survey, both Abercrombie and its Hollister brand made the top five list of brands no longer worn by teen girls. The same was true for the previous three seasons. Aeropostale was ranked first on that dubious list during all four seasons. Abercrombie and American Apparel's advertising campaigns, once considered edgy and sexy, were also seen as outdated and desperate.
Charney and Jefferies' personal behavior exacerbated those problems. Charney was fired after being hit by multiple sexual harassment lawsuits from employees. Jeffries famously boasted that Abercrombie was an "exclusionary" brand designed for the "attractive all-American kid with a great attitude and a lot of friends." Both companies have also been accused of treating store employees like "working models" and discriminating against applicants which didn't fit their standards. Both companies might have gotten away with that in the 1990s, but in the age of social media, those actions quickly snowballed into PR nightmares and calls for boycotts.
For American Apparel (L) and Abercrombie (R), sex doesn't sell anymore.
A tough mess to clean up
To avoid the fate of American Apparel, Abercrombie needs a new CEO to transform the brand again. But nearly a year after Jeffries' resignation last December, the company still lacks a permanent leader. For now, the company is implementing predictable strategies for a struggling retailer: shuttering non-performing locations, boosting e-commerce initiatives, reducing prices to boost comparable sales, and scaling back branded apparel.
However, none of those initiatives are boosting sales in a meaningful way. Abercrombie's full year comparable store sales declined 8% annually last year, causing total sales to slide 9%. In the first six months of fiscal 2015, Abercrombie's comps fell 6% annually as total sales plunged 11%.
During last quarter's conference call, Abercrombie's management highlighted some minor improvements, like Hollister's increased presence on Instagram and Snapchat, "modest" gains in jeans, dresses, and women's tops, and the reduced level of "scent, volume, and music" in its stores. However, the company didn't drop any hints regarding a CEO appointment or offer a game plan to challenge fast fashion players like H&M.
How to stop the bleeding
A simple look at Gap's (GPS 6.97%) recent earnings reveals how tough the retail apparel sector is. Gap's three core brands -- Old Navy, Gap, and Banana Republic -- were long considered the smart and diversified way to sell clothes across different price tiers. Old Navy usually thrived in leaner times, Banana Republic did better when customers had more disposable income, while Gap appealed to mid-range customers.
Yet in the first six months of fiscal 2015, only Old Navy posted positive comps growth, thanks to the market addiction to cheap and quickly rotated apparel. Banana Republic's comps fell 8% and Gap's slid 6%. That's likely because Old Navy's former president, Stefan Larsson, spent 15 years at H&M. That's also why Ralph Lauren (RL 4.28%) recently poached him from Old Navy to become its new CEO.
Gap's troubles show that Abercrombie needs to follow Ralph Lauren's lead and hire a new CEO from the likes of H&M to reinvent the company. If Abercrombie can't find that leader to help the company evolve in a timely manner, it could eventually become the next American Apparel.
