The impressive turnaround of Abercrombie & Fitch
Did you know that during the last 12 months, Abercrombie & Fitch has been the 13th fastest company to grow market capitalisation in the US? The company's market capitalisation has grown by more than 450 %, the 13th biggest gain in the US stock market. For comparison's sake, NVIDIA has grown its market cap by more than 210%.
From toxic growth to a tailspin
Abercrombie & Fitch became famous for its rapid growth in the ’90s and early 2000s. The company was also extremely exclusive, selling products with highly attractive employees. Former CEO Mike Jeffries became famous for his exclusive remarks. He even went on to say:
”In every school there are the cool and popular kids, and then there are the not-so-cool kids. We go after the cool kids. We go after the attractive all-American kid with a great attitude and a lot of friends. A lot of people don't belong [in our clothes], and they can't belong. Are we exclusionary? Absolutely.”
The company was also exclusive about its employees and even sued for discriminatory hiring.
The company faced first real problems with the financial crisis of 2008. The revenue rebounded back to growth and surpassed the pre-crisis level in the early 2010s. However, the decline started in 2013. In Q1/2013, Abercrombie & Fitch went into a tailspin, which saw revenues decline for 18 consecutive quarters
As the company could not turn its fortunes, Mike Jeffries was ousted in December 2014. The new CEO, Fran Horowitz, was promoted to CEO in February 2017. The sales decline turned to growth for the first time in Q3/2017.
The company was not able to recover much of the lost sales. After a slight growth, the sales plateaued and plummeted again during the pandemic.
Impressive turnaround with a clear focus
The pandemic recovery was sluggish after the initial rebound in sales. Sales started to grow more robustly only in Q1/2023. For the last four quarters, Abercrombie & Fitch has seen double-digit growth.
That growth spurt enabled the company to grow near its all-time high revenue levels reached in 2013. The revenue growth has been coupled with a significant improvement in profitability. The company has improved its EBIT margins from 2% in late 2023 to 13,5% for the last 12 months. The EBIT profits have grown by sixfold from around $100 million to over $600 for the trailing 12 months.
This has been enabled by a) increasing gross margins with more attractive product lines, b) increasing inventory turnover and c) reducing overhead costs relative to revenue.
This growth in revenues and profits has catapulted the company's share price to stratospheric heights. During the latest jump, Abercrombie & Fitch's market capitalisation surpassed the previous peak that was achieved prior to the 2008 financial crisis.
Reinvention of a toxic brand
Abercrombie & Fitch is a very interesting case of reinvention and turnaround, as the company has been able to rid itself of the toxic baggage it was carrying from the Mike Jeffries era. During that time, the company was focused on teenagers, whereas during the new turnaround, the focus has been put on a narrow demographic: 21- to 24-year-olds. As the images below show, Abercrombie & Fitch is a very toned down version of the company in the early 2000s (image credit: Abercrombie & Fitch).
If Mike Jeffries wanted the company to be exclusive and avoid being everything for everyone, the Abercrombie & Fitch of Fran Horowitz is also very focused, but in a very different way.
”We thought our most effective strategy would be to go deep and focus on the very specific needs of young people who are just leaving college and starting their own lives.”
Despite being seen as a 90s growth company, Abercrombie & Fitch has over 130 years of history. Chief Marketing Officer Carey Collins Krug leaned on the company's long history while thinking about how to approach the new core segment of the company. In its history, the company has been famous for outdoor gear and weekend activities in the countryside (with customers like Ernest Hemingway). Ms Krug saw the parallel to this day.
“When you think about the concept of a great escape, and you put that into today’s 20-something vernacular, it’s the long weekend. So we started with understanding that 96-hour period in our customers’ lives.”
To double down on the core segment, Abercrombie & Fitch has developed the product offering with this segment in mind. However, unlike in the Mike Jeffries era, the company wants to be very inclusive in its offering, speaking to all young adults.
To renew the image of Abercrombie & Fitch, the company wanted customers to find them instead of the company coming to the customer with big ads. For that, the company turned to Tiktok. As Carey Collins Krug explained to the Wall Street Journal:
“We have a huge army of brand advocates and creators that also create content for us and what we have found is that when you lean into content creators that are native to the platform, that media will perform significantly better than content that we create for those platforms.”
Selecting young adults (in their early 20s) as the core customer is a good strategic choice. There are not too many brands that cater for that demographic. The fast fashion retailers focus most on the younger generation (the same that Abercrombie & Fitch used to focus on). The Hollister brand within the Abercrombie & Fitch company caters to the younger demographic.
The clear focus on core customers makes it easier to make choices in the assortment or marketing.
Also, the stores have changed from big and splashy stores in expensive central locations to more relaxed and toned-down atmospheres. This highlights how the stores are a great way to communicate the brand and, in the case of Abercrombie & Fitch, to move the image away from the past baggage.
Abercrombie & Fitch is a great example for any retailer that it is always possible to turn around a company's fortunes. The company's toxic image was successfully transitioned with the right assortment, a mix of advertising choices related to the channels and messages, and patience, of course.