Lack-luster Friday?

I was recently walking around a local upscale-ish shopping mall I frequent fairly regularly, when I happened upon something new and intriguing. It was a store front, sporting Pella flooring-esque wood panels, rugged grey stone and trippy blue, back-lit glass instead of a more traditional window and mannequin set up. I was compelled to enter.

Passing through the altar of trendy modern design, I was informed by a cohort of mine that Martin + Osa, the retailer whose store-front I was still ogling from over my shoulder, was a sub-brand of American Eagle Outfitters and that it was relatively new. After a quick survey of the large store, populated with over-friendly monks patrolling the hip, earth-tone temple and pushing their wares with religious zeal, I realized that the clientele being targeted were more akin to shoppers of Banana Republic and Reuhl, than those that American Eagle attracts. I was shocked at the prospect that this was a new venture, considering the state of the turbulent, post sub-prime economy and unprecedented economic times in general.

American Eagle Outfitters began launching this new brand in 2006, but the majority of stores opened this year and last. It was designed to directly compete with Ambercrombie & Fitch’s Rheul and the Gap’s Banana Republic, both of which serve clientele ranging from twenty-five to forty and strive to be provide a more upscale shopping experience, to match their significantly more upscale prices. And herein lies the problem that I see with AEO’s decision to introduce this brand now. They really have rolled the dice with this one at a time when Abercrombie & Fitch, a competitor of American Eagle Outfitters, is aggressively expanding outside of the United States, opening new a new stores in Milan and London, due to disappointing earnings over the past two years.

In the advent of the sub-prime meltdown and the consumer credit freeze and even before that, when a questionable dollar and $100 barrels of oil dominated the front pages, many retailers had recognized the necessity of building new stores not on U.S. soil, but taking their shows on the road to Europe and Asia. In fact, if A&F had had the insight to make the move a few years ago, they could have avoided the hits their stock price has taken as of late. However, Abercrombie & Fitch (NYSE: ANF) continues to grow their revenue significantly from year to year (2.0 billion in fiscal year ‘05 to 3.7 billion in ‘08) while at the same time reducing their percentage of sales devoted to cost of goods sold (33.64% to 33.03). AEO has reported similar gains in the past three years and both companies have seen a slowing of growth in the past two.

Martin + Osa’s problem is that they are too upscale to establish and build their brand in the current economic landscape and they are not upscale enough to be immune to it. While both traditional and online retailers have seen better than expected sales on Thanksgiving and Black Friday (the jury’s still out on “Cyber Monday”), outlook for consumer spending this holiday season remains grim. Black Friday sales increased approximately 3% over last year. This is an exciting number considering that most experts were predicting a decline of 3% or more.

But, the retailers enjoying big gains are discount chains, like Walmart, and those that are offering big sales and slashing prices. Pacific Sunwear (NYSE: PSUN), a struggling company whose share price has plummeted 90%, advertised a 50% sale on everything in their outlet at a mall in northern Virginia that opened at midnight Black Friday. Pacsun had one of the longest lines at the mall, snaking down past about a dozen stores, with security guards acting as bouncers at the door to ensure the sale did not provoke shopper pandemonium.

At the same mall, a Coach (NYSE: COH) outlet attracted even more rabid shoppers. Forming a massive queue that bisected a huge courtyard, some early morning shoppers waited more than two hours in the morning frost to get a chance at the luxury handbag designer’s deep discounts. Shoppers couldn’t resist the enticing sales at outlet malls and department stores across the country, and the nation’s online retailers are hoping that they can keep the buying frenzy going this Monday.

The National Retail Federation has reported that a record number of online advertisements have been sent out this year for the holiday season. Some were sent out as early as October. And with new, more intuitive software being employed and demographics being targeted more closely than ever, online retailers cut their prices hoping to increase volume. We’ll be standing by to see how that pans out.

Tags: abercrombie, black friday, fitch, online, outlet, shopping