Abercrombie full-price strategy proving a hard sell

By Alexandria Sage - Analysis

SAN FRANCISCO (Reuters) - Abercrombie & Fitch (ANF.N) has kept its cool in a recession, selling its pricey clothing at a premium. But a steady sales decline is making investors argue the brand must be practical -- and start to discount.

The teen retailer, known for its billboards with near-naked male models, has stuck by its full-price strategy even though shoppers have proven their interest these days is only piqued by steep markdowns.

Some investors and analysts say it is time to reconsider.

"We're in a different consumer environment. We're in trench warfare with the consumer," said Jefferies & Co analyst Randal Konik. "My fear is you have companies in the aspirational segment with aspirational price points ... that are having real struggles."

Abercrombie, along with top retail names like Coach Inc (COH.N) and J Crew Group Inc (JCG.N) might have a hard time lowering prices, given years of casting its brand as a higher-priced, luxury alternative.

But Abercrombie could also be overly worried that promotions would tarnish its image. Even the most luxe names are cutting prices, said Konik, who rates the shares a hold.

"When you have Gucci on sale, Prada on sale, Neiman's on sale, everyone in the mall is on sale ... it's not totally a bad thing to be on sale," he said.

Once the teen sector's high-flyer, Abercrombie is now posting the most dismal sales results within the group and ceding market share to lower-priced rivals like American Eagle Outfitters Inc (AEO.N) and Aeropostale Inc (ARO.N).

On Thursday, Abercrombie warned its fourth-quarter profit would fall significantly short of its own forecasts after reporting December same-store sales fell 24 percent.

That made the company the worst sales performer in December out of 35 companies whose results are tracked by Thomson Reuters.

SHARES AMONG MOST BATTERED

The New Albany, Ohio-based company has posted double-digit same-store sales declines since August, including a 28 percent drop in November at the start of the holiday shopping season.

Abercrombie's shares trade close to $21, down from a high of more than $82 hit in February.

They are also down 70 percent from a year ago, compared with declines of 44 percent at American Eagle Outfitters and 25 percent at Aeropostale.

"It's certainly hurting them in the short term, as you can tell," said Ken Perkins, president of retail research firm Retail Metrics.