If you haven't heard by now, Abercrombie & Fitch (ANF) has been in the news for the CEO's poor comments on customers. Chief executive officer Mike Jeffries made insensitive comments to plus size customers and now has protestors and boycotts heading towards his stores. Amazingly enough, shares of the teen retailer trade close to 52 week highs. It's time to sell Abercrombie shares before sales take a hit.
Back in a 2006 interview with Salon, Jeffries made known that he was very strict about his company's demographic. At the time he offered this,
In every school there are the cool and popular kids, and then there are the not-so-cool kids. Candidly, 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.
While it shouldn't come as a surprise that Abercrombie targeted that market, Jeffries comments singled out people who should not wear his company's clothes. Jeffries also said, "Those companies that are in trouble are trying to target everybody: young, old, fat, skinny. But then you become totally vanilla. You don't alienate anybody, but you don't excite anybody, either." Abercrombie has done a good job of appealing to its core audience, but new viral campaigns against the company will likely have an impact on 2013 sales.
The seven year old interview has found its way into a viral campaign online. Recent news reports show that Abercrombie stores don't carry XL sizes for women. The stores also don't carry women's pant sizes over 10. The average pants size for American women is 14. Not only is Abercrombie appealing to the cool kids, it has cut its target market in over half by only carrying sizes that fit the smallest teenagers. Plus size shoppers make up 67% of United States consumers.
One of the biggest things making waves online is a "Fitch the Homeless" campaign. An article on the Huffington Post about the movement had over 322,000 shares on Facebook, 17,000 tweets, and an additional 3,000 email shares (as of Thursday). The actual YouTube video created by Greg Karber had over 5 million views (as of Thursday). The video promises to give Abercrombie a brand readjustment by giving away Abercrombie clothes to homeless people. In fact, at the end of the video, Abercrombie is labeled as "The World's Number One Brand of Homeless People".
A new petition on website Change.org has collected over 27,000 signatures. The petition demands that "Abercrombie & Fitch CEO Mike Jeffries: Stop telling teens they aren't beautiful; make clothes for teens of all sizes!"
Another area of concern may be marketing strategies by rivals. Key rivals Old Navy (GPS), Aeropostale (ARO) and H&M could be ready to exploit Jeffries' strategy. If these clothing companies offer plus sizes in stores, I would be on the offense and offer a discount on merchandise for the exchange of Abercrombie clothes. What better way for these rivals to take advantage of a situation than to go on the prowl.
As a publicly traded company, shareholders could attempt to oust Jeffries. That is unlikely as Jeffries has turned the company around and created wealth for current shareholders. Jeffries also owns 2.8% of outstanding shares and has a buyout clause in his current contract. With a contract that runs through February 22, 2014, shareholders will likely see Jeffries for at least another year.
Abercrombie & Fitch could also go on the offensive and increase its dividend or raise its share buyback program. This would keep shareholders invested for the long run and offset any potential worries about sales declines. Abercrombie & Fitch could also acquire or start a new brand with plus sized customers in mind. While this seems unlikely, it could be one of the easiest ways for Jeffries to say sorry without saying sorry.
This isn't the first time Abercrombie & Fitch or Jeffries has been negatively portrayed in the news.
- Jeffries has been the subject of shareholder disapproval over the high bonuses he receives every year. Reuters recently reported that Jeffries' compensation fell 80% to $8.2 million. In the prior year, Jeffries received stock options worth $43.2 million.
- A pilot sued Jeffries over age discrimination for his firing in place of younger employees on Jeffries' corporate jet.
- The American Decency Association attacked Abercrombie & Fitch over their pornographic display of teenagers in the company's catalogs. The catalogs with models were eventually stopped.
In an era where the internet spreads news like wildfire, it seems like the time to exit Abercrombie & Fitch. Similar to when I was bearish on Carnival Cruise Lines (CCL), this is the time to take profits and head for the exit. If you like the company, be patient and get a better buying opportunity later on. Since readers misunderstood me on my Carnival piece, I'll say it again. I am not saying Abercrombie & Fitch will go bankrupt or disappear. This is only a matter of timing and a short term selling opportunity.
I recommended shares of Abercrombie & Fitch back in November of 2012. At that time shares were trading at $42 and looked promising due to international expansion. Since that time, shares have reached new highs above $54.
Shares of Abercrombie & Fitch are up 12% in 2013 and now are out of cheap valuation range. Analysts expect the company to earn $3.50 in fiscal 2014. This comes as a 20% increase to the $2.91 posted in fiscal 2013. Revenue is expected to increase 7.2% to $4.83 billion. Shares are currently trading for more than 15x this year's earnings. With shares at 52 week highs and a high price to earnings ratio, a negative PR campaign could be a disaster. Sales in the next two quarters could get hit and send shares back to Earth.