• CHANTAL FERNANDEZ

American Eagle and Abercombie & Fitch: What the Potential Deal Says About the State of Retail

The teaming up of the two longtime rivals indicates an accelerating trend toward challenged brands seeking growth through consolidation.

NEW YORK, United States — Are two longtime mall rivals poised to join forces? On Wednesday, a report in the Wall Street Journal posited that preppy-teen retailer American Eagle Outfitters and private-equity firm Cerberus Capital Management are working together on a bid to acquire the long-maligned Abercrombie & Fitch.

The Columbus-based Abercrombie & Fitch, which also owns Hollister, confirmed earlier this month that it was in talks with several parties about a potential deal. Now, the Pittsburgh-based American Eagle, which has performed well in the past few years as its contemporaries have suffered, is swooping in with Cerberus Capital Management.

The New York-based private equity firm specialises in distressed investing and could provide the funding American Eagle needs to make an attractive offer. The Schottenstein family, the retail dynasty that owns a major interest in American Eagle, has worked on a series of mergers with Cerberus.

Representatives for American Eagle Outfitters and Abercrombie & Fitch did not comment and further details were not disclosed. However, the potential deal indicates an accelerating movement toward challenged brands seeking growth through consolidation.

Coach Inc.’s acquisition of Kate Spade & Company in May 2017 underscored this trend. Coach, the brand, underwent a turnaround of its own in recent years by shifting from the mid-market towards a more luxury positioning. However, it is not growing fast enough for shareholders, which means it must accelerate growth through acquisitions.

“The Coach brand is comping closer to low-to-mid single [percentages], it’s not aggressively growing,” Cowen & Company analyst Oliver Chen told BoF in March 2017. “To obtain a higher valuation in retail, you need to accelerate growth.” As a brand group — which also includes Stuart Weitzman — Coach Inc. can cut costs on production, negotiate more favourable lease terms for retail real estate and speed up international expansion, reaching different consumer sets with different brands along the way.

Walmart has also gotten into habit of scooping up smaller retailers that could reach different consumer segments. Through Jet.com, which it acquired in August 2016, it has purchased ModCloth, MooseJaw and Shoebuy, all within the past year. (Jet is now reportedly eying men’s apparel brand Bonobos.)

Forming portfolio companies may be one smart way for brands to ward off the ultimate portfolio company, Amazon, set to become the largest apparel retailer in the country this year, according to Cowen & Company.

A similar move could make sense for long-time rivals American Eagle Outfitters and Abercrombie & Fitch. Together, the companies could find cost-cutting synergies in real estate, supply chain and digital costs while reaching more consumers through differentiated and targeted brands.

“The trend now is not to buy companies and just absorb them, but to let them do what they do best,” says retail consultant Carol Spieckerman. “This potential merger is the latest example of one the most dramatic waves of retail compression and consolidation. There have been many such waves throughout history, and I think we’re in the early stages of a significant one. ”

"You don’t need additional stores; maybe you need another concept."

“People are looking for individuality, they don’t want these massive retailers trying to be everything to everyone,” adds retail consultant Gabriella Santaniello of A Line Partners. “You don’t need additional stores; maybe you need another concept…. Even though American Eagle and Abercrombie are technically mass market, it’s not a mass look.”

Both companies have struggled in recent years, not only because of larger retail woes — decreased mall traffic, decreased apparel spending in favour of other categories and experiences, increased online spending and a fast-fashion-induced expectation of speed to market — but also because of problems plaguing teen-focused retail in particular. (Pacsun, Aéropostale, Delia’s, Rue21, Wet Seal and American Apparel have all filed for bankruptcy in the last three years.)

“Many of these specialty retailer chains were created to appeal to millennials and millennials are aging out of these concepts,” says Spieckerman. Millennials are also far less interested in trends, favoring individual street style-inspired looks instead and heading to fast-fashion giants H&M and Zara for any trends that do end up emerging on social media.

American Eagle Outfitters has a secret weapon in lingerie brand retailer Aerie, which posted a 23 percent year-over-year sales increase of in 2016. Aerie was early to adopt the body positive marketing message that resonates with millennial consumers and is proving a significant threat to Victoria’s Secret sexy image. Meanwhile, the namesake brand has generally stuck to its more bohemian — and more wholesome — identity. “American Eagle has avoided the controversies, the perceptions of arrogance or being out of touch or stuck in their ways that have plagued Abercrombie & Fitch,” says Spieckerman.

Abercrombie & Fitch has tried to course correct in the past few months, adding womenswear to popular menswear designer Aaron Levine’s responsibilities in December 2016, and promoting chief merchandising officer Fran Horowitz to chief executive in February 2017. But with its renewal still underway, the brand continues to struggle in convincing consumers that it has left its controversial identity behind. However, if Abercrombie’s latest efforts to appeal to an older customer are successful, it could help American Eagle reach a new segment of the market.

But a merger between American Eagle Outfitters and Abercrombie & Fitch won’t solve problems overnight. Especially as Abercrombie & Fitch also owns Hollister, which has surpassed the namesake brand in sales and vies more directly for marketshare with American Eagle. “It’s going to be no small task to combine the two, looking at the duplication of stores, looking at which stores are productive,” says Spieckerman. “It’s not like suddenly they are going to hit the ground running with double strengths.”

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