Specialty chains spun off new concepts that targeted different demographics. Teen retailer Abercrombie & Fitch spawned Ruehl for postgrads, while rival chain American Eagle created Martin + Osa with casual clothes for young professionals. J. Crew launched Madewell, a sort of hipster little sister. Aeropostalehad a rock-inspired chain called Jimmy'z.
But now their fledgling concepts are struggling in the face of the worst recession in decades. At best, they have become distractions to the companies' already embattled management. At worst, they are a drain on earnings -- and some are shutting down altogether.
"It's hard enough for new brands to gain traction in a new environment let alone in the worst recession in decades," said Todd Slater, an analyst with Lazard Capital Markets. "In downturns, many new initiatives are sidelined."
Last month, Abercrombie announced it will close its 29 Ruehl stores, including one in Tysons Corner Center. Jimmy'z went dark back in February. Some analysts wonder if American Eagle will pull the plug on Martin + Osa. And J. Crew executives have admitted missteps in fashion and pricing at Madewell.
Retailers are under enormous pressure to reinvigorate sales and slash costs. June sales at stores open at least a year -- a key industry measure of health -- dropped 4.7 percent compared with last year, according to data released yesterday. Specialty retailers took one of the biggest hits, with sales at Abercrombie plummeting 32 percent in June, the worst performance of any retailer yesterday.
During flush economic times, retailers embraced new concepts as a way to increase sales. Many chains had already saturated shopping centers with new stores, so if they wanted to win new customers, they had to create new concepts for them to shop.
"One thing everyone's afraid of is [a chain's] maturity," said Brian Tunick, an analyst with J.P. Morgan.
Some spinoffs have taken off. Victoria Secret's collegiate-inspired Pink stores are considered one of the most recent success stories. American Eagle followed suit with Aerie, which also has experienced solid results. Retail experts consider Gap's launch of Old Navy in the 1990s one of the greatest hits ever, though the chain is struggling now.
But dismal sales have forced some retailers to think twice. Many are retrenching by shutting down stores, slashing staff and marking down prices. And investors have little patience for money-losing concepts.
"Later Jimmy!" read the headline for a research report by Jefferies analyst Randal J. Konik. "Other retailers should follow suit."
Aeropostale's reputation for bargains has helped it deliver one of the few strong performances during the recession, and it was the first to jettison its money-losing concept in February. Jimmy'z had 11 stores with an L.A. rock vibe targeting 18- to 25-year-olds. The company cited macroeconomic conditions in closing the brand, which it had launched in 1995.
Abercrombie's Ruehl stores, launched in 2004, were designed to resemble a Greenwich Village brownstone. Unlike most stores that showcase their wares in their windows, no merchandise was visible to mall pedestrians, a thumping bass line and the scent of a musky cologne the only invitations to walk inside.
But though the design was elaborate, analysts said the clothing -- torn denim, slouchy T-shirts, soft camis -- was too similar to the merchandise in traditional Abercrombie stores. The concept lost $58 million before taxes last fiscal year. Abercrombie also said closing the chain will result in about 200 job cuts.
Industry experts have been speculating that American Eagle could close its unprofitable Martin + Osa brand. But American Eagle executives said sales at the chain have picked up 7 percent from last year, with particularly encouraging signs in its women's business, and they hope for further improvements the rest of the year.
J. Crew chief executive Millard S. Drexler has acknowledged that clothing at its Madewell spinoff was too basic and expensive, particularly the jeans. The concept is costing the company about $15 million this fiscal year and it lost about $11 million last year, according to Needham analyst Christine Chen.
In a recent conference call with investors, Drexler said that when plans for Madewell were drawn up three years ago, the company decided to start denim at $98 -- and shoppers balked. Now the cheapest jeans are $59.50.
"So frankly, in hindsight, a mistake," Drexler told investors. "The world is kind of changed dramatically in that regard."
Bringing a new concept to profitability requires a large investment. The rule of thumb, Tunick said, requires 80 to 100 stores ringing up $400 in sales per square foot to break even. Closing a concept now doesn't always mean it was doomed to failure. Few predicted the consumer meltdown that occurred last fall.
"I don't think a weak-performing new concept or spinoff is indicative necessarily of anything more than a flaw in timing," Slater said.
And retailers are not abandoning all hope of innovation. Abercrombie is slated to open a new iteration of its surfer Hollister chain called Epic Hollister in New York later this month that is touted as 40,000 square feet of "pure California fantasy." Aeropostale recently opened a new store for tweens called P.S. From Aeropostale, with nine more planned for this fiscal year.
"If you're not moving now to be there, you're going to be playing catch-up by the time the consumer returns," said Marshal Cohen, chief industry analyst for NPD Group, a market research firm. "It's the world's worst time to be sitting still."
I think that this article is correct in the fact that it was a bad time in the shopping market to open all these stores that were just as high priced as the ones that opened them. Shocking? No, if they will charge to much for it once then they will charge too much for it again. I do think that J. Crews Madewell CEO learned a valuable lesson in all this mess. They realized they were not getting as many customers as they needed and they therefor dropped the prices all together and people noticed. Smart? Yes! Now people can shop the great look of Jcrew for less, which is what people wanted in the first place. It just took a mistake to get it fixed.
