Abercrombie is making a calculated bet

Assuming COGS as a proxy for inventory moved in a quarter, we find that abercrombie and fitch typically purchases ~$300 million in inventory per quarter which would imply that the company held almost two quarters’ worth of inventory at last check. In all likeliness, this backlog is mostly fall and winter clothing. Sooner or later, the company will have to clear this inventory, probably before summer. Knowing how quickly fashions can change, I wouldn’t imagine that it would be easy to move this build up without eventually succumbing to the so-called “promotional pied piper.”

hollister clothing is making a calculated bet in maintaining prices despite the fact that competitors have been slashing prices across the board. My assumption is that it hopes that by bucking the trend it can accomplish the following:
1. Maintain its “casual luxury” image by not chasing its demographic down market.
2. Magnify its brand appeal through its relatively “aspirational” pricing. The company hopes that empty-handed teenagers will be walking out of the store thinking, “Someday when I have the money, I’ll buy tons of Abercrombie!”
3. Capitalize on consumer surprise when competitor prices jump back up to pre-recession levels and Abercrombie’s “miraculously” stay flat.
The problem, however, is that for this strategy to work Abercrombie must prove to have a truly defensible luxury product. My contention would be that teen apparel is very substitutable. It is, after all, difficult to establish “aspirational” status for ripped jeans and double entendre t-shirts. In trading down or going to other similarly, “aspirational” teen retailers such as Urban Outfitters (URBN), which are running sales, customers may find that that they don’t necessarily need to return to hollister.
In addition to long-term risk to the Company’s demographic appeal, the decision to maintain prices in the face of lower revenues has put some stress on Abercombie’s balance sheet that will have to be dealt with. A quick look at Abercrombie’s inventory and cost of goods sold finds that the company held $505 million in inventory at the end of last quarter, up from a typical $400 million-ish that are typically held through the last two quarters of the year.