By  on February 27, 2014

Abercrombie & Fitch Co., working on some out-of-the-box thinking, is contemplating a major shift in its business model.

The specialty chain is eyeing expanding the number of outside brands within its own stores and online, as well as selling its branded merchandise to other retailers. Separately, it is also testing made-for-outlet product in select locations.

The strategy was disclosed in a conference call to Wall Street analysts by chief executive officer Michael S. Jeffries following Abercrombie’s reporting of fourth-quarter and full-year results. The shift comes as A&F is under increasing pressure from activist investor Engaged Capital — forcing Jeffries to cede the chairman’s title to Arthur Martinez — and has seen profits and sales fall amid the overall struggles within the teen sector.

“From a strategic standpoint, it is clear that we need to be thinking outside of the confines of our existing vertical specialty retail model,” Jeffries said. “This includes looking at selling third-party brands through our channels, and selling our branded merchandise through third-party channels.”

He added, “We are talking pretty extensively on third-party [selling] in our existing channel. We are introducing a number of initiatives there as the year progresses. In terms of selling through third-party [channels], this is something we’re just starting to look at. It could be a very interesting opportunity. It’s interesting in terms of volume potential there. In terms of selling third party in our channels, there is volume opportunity, but it is also a positioning device for us.”

A spokesman for Abercrombie said the company began selling select items from the Keds brand in August. The structure of that arrangement involves a combination of Keds stockkeeping units on the Hollister Web site and a few items in exclusive prints for the site. While the stores have the items on hand for show, purchase of the Keds product can be done only online. He cautioned that the structure of the Keds arrangement is not necessarily the same one that will be used for new brand introductions.

The spokesman also said, “In the very near future, you will see more of the third-party brands.” He also confirmed that the introduction of other brands is being eyed for Hollister and Abercrombie stores and online.

Jeffries said the third-party brands are in the areas of footwear, apparel and accessories.

Most vertical retailers sell only their own product, although Urban Outfitters does sell select products from third-party brands such as Converse, Dr. Martens, Timberland and Vans.

There have been other changes at Abercrombie, as well. In naming brand presidents as part of its branding initiative, the company has shifted to a vertical structure instead of running the firm horizontally by product category. Jeffries said on the call the move “will enable us to have more distinguished product, product that’s different from one brand to the next and also will enable us, through new insight with these new people, to look at the business a little differently.”

The ceo said the company is also testing “outlet stores with made-for-outlet product. We have not been in that business before. We have only used our outlets as clearance.”

He noted that the company has a road map for growing its outlet business in the U.S. and overseas. It has two made-for-outlet test sites, one in Seattle and the other in Kent, England. “We are opening more test stores over the next couple of months. We’re looking at this as a real potential in terms of the business, but we have to be very sure about the results” before rolling out the format.

Generally it could have been a far better quarter for Abercrombie, which saw fourth-quarter profits fall 58 percent from a year ago.

For the fourth quarter ended Feb. 1, net income fell to $66.1 million, or 85 cents a diluted share, from $157.2 million, or $1.95, a year ago. On an adjusted basis, eliminating charges in part with the closure of Gilly Hicks, net income was $1.34 a share, which beat analysts’ consensus estimates by 31 cents.

Net sales slid 11.5 percent to $1.3 billion from $1.47 billion, while comparable-store sales fell 8 percent, reflecting a 16 percent drop in same-store sales offset by a 24 percent jump in direct-to-consumer sales.

For the year, net income fell 77 percent to $54.6 million, or 69 cents a diluted share, from $237 million, or $2.85, in 2012. Net sales fell 8.7 percent to $4.12 billion from $4.51 billion.

Shares of Abercrombie rose 11.3 percent to close at $40.04, reflecting the consensus estimate of 31 cents for the quarter and the profit guidance for 2015 diluted earnings per share at between $2.15 and $2.35.

“A significant decline in store traffic that began in July continued through the holiday season and, as yet, has shown no sign of abating,” Jeffries told analysts. “Despite that difficult context, it is important that we return to positive growth, particularly in our core U.S. business, and the steps we are taking as we execute against our long-range strategic plan should put us in a position to achieve this goal.”

He said the priority is improving the fashion merchandise in the women’s business.

Overseas, the company continues its expansion plans, with the opening of 16 locations, including a flagship in Shanghai in April. Jeffries said the company opened its first store in the Middle East during the quarter at the Mall of the Emirates in Dubai.

Separately, L Brands Inc. said after the markets closed that fourth-quarter net income for the period ended Feb. 1 rose 19 percent to $489.6 million, or $1.65 a diluted share, from $411.4 million, or $1.39, a year ago. Net sales slipped 1 percent to $3.82 billion from $3.86 billion, while comps rose 1 percent.

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