What Gap Can Teach Abercrombie & Fitch

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Teen retailer Abercrombie & Fitch Inc. (NYSE: ANF) said on Wednesday that same-store sales have fallen 14% in the third quarter, and that it expects a fourth-quarter drop in the low double digits. The stock declined from Tuesday night’s closing price of around $38 to about $33. That is down about 60% from the 52-week high of $55.23.

The store sees its problem as reacting too slowly to changes in fashion, which has the effect of boosting inventories and chomping on margins. Add in too many stores and a commitment to its taste in merchandise. That litany of troubles is not unlike those that faced Gap Stores Inc. (NYSE: GPS) a few years ago.

Since the beginning of 2012, Gap’s share price has doubled while A&F’s has fallen more than 30%. What did Gap do to turn its ship around, and could A&F follow the same rule book?

The first thing that Gap did was add some color to its denim product line to get customers back into the stores. The customers liked what they saw and Gap found that it could sell more merchandise at full price, boosting its margins. A&F has stuck to its guns and simply has not been willing to make the overhaul to its merchandise that Gap embraced in late 2011.

Gap also closed stores — 189 since 2012. A&F is also closing stores — 180, beginning last year and continuing over the next few years. A&F’s problem is that it will not bite the bullet and close the stores quickly. Dragging the closings out over several years will do nothing to help build margins again.

And then there is management. Gap’s chief executive has been with the company since 2007, and he has been willing to make the changes that the company needed to make in order to become a relevant retailer again. Mike Jeffries has been A&F’s CEO since 1992 and was named our worst CEO of 2012. Over the past three years, Jeffries has been paid more than $107 million as the company’s stockholders have lost nearly 40% of the value of their investment. It could be past time for a change at the top.

Gap shares were up 6% in premarket trading Friday, at $40.02 in a 52-week range of $29.84 to $46.56.

A&F’s shares were inactive, having closed Thursday at $33.00 in a 52-week range of $30.74 to $55.23.

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