“…every new beginning comes from some other beginning’s end” -- Closing Time
At first glance, these stories don’t seem to share too much in common other than being the latest casualties in a brutal recession. While retail sales have been hit hard in general, apparel retailers have taken an even greater toll -- perhaps the biggest surprise is that we haven’t seen more bankruptcies and closures. Behind the curtains, though, both have lessons to tell, not entirely related to the recession.
For Eddie Bauer, this filing almost seemed inevitable. After emerging from the Spiegel bankruptcy in 2005, the company has struggled to regain its prominence as a specialty apparel retailer. With Spiegel, the company grew far too fast and lost direction, moving away from its outdoor performance roots towards casual apparel. As an independent company, it experienced further bumps along the way, moving too far fashion forward at times, then perhaps too conservatively as it struggled to regain its way. The company lost focus and its soul along the way.
With full disclosure, we had the opportunity to work with Eddie Bauer around two years ago, helping the management team craft an interim strategy. With Neil Fiske’s arrival, he developed a direction that simultaneously invoked the company’s (and its persona, Eddie Bauer) strong outdoors heritage while also attempting to move it forward as well. What the company couldn’t afford was this current economic downturn. Executing a turnaround with razor thin margin for error isn’t easy (and nearly impossible) in trying times.
What is particularly encouraging about this particular Chapter 11 announcement is that it stands in marked contrast to other high profile filings recently. Rather than simply disappear from the retail landscape (think Linens ‘n Things, Circuit City, Sharper Image and a host of others), Eddie Bauer may actually emerge as a significantly stronger company that has a full opportunity to regain its prominence. While Chapter 11 is never a good thing (particularly for all current company stakeholders), in this instance, new proposed ownership is in place with some interesting stipulations: while there is still conflicting stories about how many stores will close—from none to up to a third, expect a significant number—the opportunity to get out of bad leases is too attractive to pass up in a filing.
More significant, however, is the private equity firm’s stated intention to finance this deal in cash, which would allow a re-emerged Eddie Bauer not to be crippled by debt, which was the cause of many a highly leveraged company’s collapse in prior times.
Though details are few and much still needs to be approved, we take this as a very positive sign of what re-constituted retail companies might look like in the future. Eddie Bauer still has a long way to go…but it begins with solid assets of real brand equity and an eponymous founder who doesn’t need any embellishments on his legend. We think the company now has a real shot to emerge as a multi-channel model for retailers in the future.
Ruehl, which announced it is shutting down its 29 stores at the end of the year, represents one of the few brand stumbles for its parent Abercrombie & Fitch. They are masters of brand building, creating their namesake brand from the ruins of a stodgy hunting brand, turning it into a hip brand for teens. They did it again with the development of the Hollister brand, bringing the same sophistication to the surfwear look. When it came time to develop Ruehl, their track record certainly suggested success. We first covered Ruehl in Retail Watch of December of 2004 (time flies in the retail world). Now, after five years, they seem to be throwing in the towel.
While Abercrombie knows how to build brands, our big concern for Ruehl (and Gilly Hicks which is their other developmental brand) is that brand building at Abercrombie is becoming too formulaic: the mysterious store front, the brand back story, the dimly lit store (we needed coal miners’ hats to see), the expensive merchandise and the beautiful but less than helpful staff…can easily describe any or all of their formats. In the case of Ruehl, the brand story takes us to Greenwich Village and a uber-hip townhome. The store was so hip that it disguised itself as a store, a novel idea but not exactly welcoming. Once in, the product never really distinguished itself from the flagship brand, and didn’t justify the more premium pricing. We actually think they were making progress during our many visits but apparently the brand was destined not to move much past a niche. We suspect we will continue to see the Ruehl brand exist (perhaps as a premium sub-brand for leather goods) within the A &F family.
We think the larger issue for retailers right now is how much they will be able to continue the push for format diversification, which was all the rage in better times. For Abercrombie, their insistence to resist discounting and maintain brand integrity is noble but is also leading to staggering sales decreases, as they now have recorded eight straight months of -20% or more comp store sales numbers. They are tightening the ship, and Ruehl may be the first casualty. We have higher hopes still for Gilly Hicks (with 15 stores) given that it goes after a different segment than Ruehl. But, perhaps the tried and true brand formula needs tweaking?
What is the lesson that ties Eddie Bauer and Ruehl together? While their paths and history are very divergent, clarity of brand positioning for the consumer emerges as a paramount theme. Eddie Bauer had a solid brand at one time, then let time and competition slowly erode it. For all of its promise, Ruehl never really founds its niche. While a well-positioned brand may not entirely protect a company in trying times, it certainly represents the foundation for long-term survival.