Abercrombie & Fitch Expansion In Trouble, With Europe On Brink
In 1961, when Abercrombie & Fitch was still a hunting store, it sold Ernest Hemingway a "Boss," the double-barreled shotgun that he reportedly used to kill himself. In recent years, the "heritage" outfitter-turned-sexy teen clothier has followed the author's footsteps to Europe, opening seven new Abercrombie & Fitch flagships and 62 Hollister stores since 2007.
Now with the European economy on life support, some are speculating that Abercrombie's expansion plans might also take a morbid turn.
American multinational corporations once saw Europe and Asia as surefire routes to profit when things weren't going well in the United States. Now, with the Eurozone in danger of breaking up and a slowdown in the Chinese economy, even these options are looking bleak.
Classic American fashion brands like Abercrombie & Fitch recently jumped on the popularity of U.S. consumer and cultural exports, opening up flashy new stores in Europe. Now, many are reevaluating their strategies. Gap Inc., which plans on opening a 16,000 square foot Banana Republic store in Paris this month, announced in a recent earnings call with analysts that it is focusing on low-priced factory and outlet stores in Italy and the United Kingdom.
Meanwhile, Abercrombie & Fitch, which raised prices earlier this year in its flagships, saw sales in those European stores decline in the third quarter. On November 17, the day after Abercrombie announced the bad news during its earnings call, the company's stock dropped 11 percent amidst worries that European expansion wasn't such a great idea.
"Clearly, the macro-environment is very difficult in Europe," CFO Jonathan Ramsden told analysts. "Tourism has slowed down. We've certainly seen a slowing of traffic into those flagship stores."
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In the past five years, brands like Abercrombie & Fitch, Polo Ralph Lauren, Gap, and Tommy Hilfiger have discovered a new Wild West in Europe. Huge stores have opened on Paris's Champs Elysees and London's Savile Row, bringing America incarnate -- plaid shorts, preppy polos, collegiate logos -- to lines of insatiable Europeans.
When police officers in Paris made Abercrombie & Fitch's shirtless male models put on hoodies this May (nudity is not allowed on public streets, officials said) it only made the company's new flagship appear even more coolly rebellious.
Meanwhile, that style has been losing its appeal stateside. In the United States, Gap and Abercrombie & Fitch are planning to close stores this year. Tommy Hilfiger, known for its classic preppy clothing once sported by rappers like Snoop Dogg, now does 44 percent of its sales in Europe, compared to 36 percent in North America. The company opened up a London flagship on December 1.
Nico Dubois, a 22-year-old medical school student from Lille, France, has a closet full of Abercrombie & Fitch and writes a blog about American style, The American Way of Life. These days, "most young French people have at least one item from A&F," he said in an email. Dubois discovered Abercrombie & Fitch ten years ago in Miami and its sister brand, Hollister, four years later in the same city. "I immediately fell in love with its SoCal vibe and cool, classy, surfer style," he said.
"The ambience of the store and its music and lighting were amazing," he said of Abercrombie & Fitch's famous blasting techno soundtrack and all-pervasive "Fierce" fragrance. "It was something that didn't yet exist in Europe."
Now, the brand is so trendy that it no longer appeals to early adopters like Dubois. Even if the clothes are still the same, and the prices cheaper than French brands, Abercrombie & Fitch has lost its exclusivity, Dubois said.
Of course, from a company perspective, less exclusivity means more Euros in the bank. "The brand has local relevance," explains Jeffrey Klinefelter, a retail analyst at Piper Jaffray. "There's very little competition for casual, classic, American lifestyle sportswear [in Europe]."
Europeans spend a lot on clothes -- 5.7 percent of total household expenditure, and as much as 7.7 percent in Italy, went to clothing in 2010, according to data compiled by the European Commission. Meanwhile, Americans spent an estimated 3 percent of their disposable income on clothing last year.
But American brands may no longer find the European fashion market so lucrative in the face of "severe macroeconomic headwinds," as Abercrombie & Fitch CEO Mike Jeffries described the debt crisis in his company's third quarter earnings call.
All clothing brands in Europe (American or otherwise) will suffer if the economy declines and consumer spending plummets. But Americans doing business in Europe would face a specific challenge -- exchange rates. With a weak Euro, American retailers' margins would drop, encouraging companies to raise prices.
While big flagships in places like Paris and London usually benefit from Asian and Middle Eastern tourists, the mid-range American brands are less well known to those shoppers than luxury retailers like Gucci and Louis Vuitton, as ISI Group analyst Omar Saad pointed out during the Abercrombie & Fitch earnings call.
Still, in the long run, the unique appeal of the American brands could save them. Klinefelter said that he isn't concerned about Abercrombie & Fitch. "Abercrombie has a great pricing power," he said. "There's such a premium to the pricing [of companies selling in Europe] that there's room for modest devaluation."
Klinefelter also pointed out that a devalued Euro would make normal opening expenses, like store leasing and construction costs, attractively cheap.
"Not opening stores at this point in time may prevent [brands] from capturing really compelling real estate," he said.
Janet Kloppenburg, president of JKK Research, thinks that the unique cultural appeal of American brands will make them more resilient to a recession than their European counterparts. "They're less vulnerable because they're new and exciting," she said. "There's been pent-up demand."
"We do something different which sets us apart," she added. "Europe creates beautiful, elegant, tailored clothing ... We create hoodies."
CORRECTION: A previous version of this article said that Nico Dubois discovered Abercrombie & Fitch four years ago in Miami. He discovered the brand ten years ago in Miami, and its sister brand, Hollister, four years later.