With a makeover and repositioning of its brand built on a revamped merchandising strategy that is fortified by a push into higher price points while eliminating promotions, chief executive officer Michael Jeffries offered Wall Street a resounding yes to that question.

“The focus is going to be on product that is more compelling, emotionally, and presented in a more aspirational way,” Jeffries told investors during a conference call on Tuesday following the retailer’s better-than-expected quarterly results.

A&F’s repositioning strategy also includes the rollout of four prototype stores, that could position the retailer against a more affluent demographic: shoppers of J. Crew and Banana Republic.

The strategy also seems to address many of the challenges facing the retailer, which were identified by analysts over the past 18 months. They include an overall “sameness” to the segment along with a lack of differentiation to the A&F brand in addition to broader issues impacting the segment such as serving a demographic with shrinking spending power.

This new direction for A&F follows the killing of the retailer’s quarterly magalogue, which featured nude models and triggered protests, that was announced last December. Analysts praised the decision at the time, saying they hoped the retailer would now be able to focus on its core product problems.

The unveiling of this new strategy caught several analysts as well as investors off guard. By late Wednesday morning, though, trading was heavy and by the time the market closed, investors sent shares ahead $2.59, or 9.2 percent, to $30.79 on the New York Stock Exchange.

Meanwhile, analysts digested A&F’s bold new plan before offering their interpretation. The reaction to layering the merchandise mix with higher price points was slightly mixed with most being bullish on A&F’s strategy.

Elizabeth Pierce, an analyst with Sanders Morris Harris, said in a research note that while she believed the past couple of seasons have been challenging, there is still sufficient equity in the A&F brand to command higher prices. But to pull it off, she said A&F has to offer items that are compelling and authentic. “The merchandise must be fashion-right and the quality must be exceptional,” she said.

Calling the surprise move “gutsy,” Janet Kloppenburg, president of JJK Research, said, “Jeffries won’t go down into the mainstream with Gap and American Eagle. And when he goes aspirational, he is looking to Juicy Couture and Seven jeans and perhaps saying, ‘I could be cool like them, but 20 percent cheaper.’”

Kloppenburg said she viewed the move as gutsy because it creates a luxury brand for the college student, which is something, she said, that has never been done. Kloppenburg said she believed jeans will be $15 to $20 above current price points, and the rinses and finishes and other styles will tell customers that “these jeans are on the edge.”

Joseph Teklits, an analyst with Wachovia Securities, wrote in a research note, in which he upgraded A&F to “outperform” from “market perform,” that the new luxury strategy shouldn’t hurt and could even boost the retailer’s base business, over time.

Jeffrey Klinefelter, senior research analyst with Piper Jaffray, agreed, saying the strategy “will reap rewards for A&F as it will likely create a halo effect in helping to raise brand awareness while validating its authenticity.”

Klinefelter noted the higher prices on well-designed products validate the overall pricing structure of a brand. Still, he said consumers have an appetite for lower-priced logo T-shirts from high-priced brands such as Bebe, DKNY and Paul Frank. “I don’t see much risk to adding incremental premium items like $100 jeans to the mix as long as it remains less than 10 percent of the total mix,” Teklits wrote. “The biggest potential reward would be making the base price business look like a better value over time as the company tells a story of high quality by adding higher price points and special product to its stores.”

Saying she was both surprised and still skeptical about A&F’s plans of layering in new price points and backing away from promotional pricing to move the brand back into an aspirational platform, Dorothy Lakner, a retail analyst with CIBC World Markets, said the changes weren’t enough to invigorate sales.

“I am just not sure that I agree with management’s assessment that they don’t see price resistance from customers, and that they can raise prices and thereby do better. I just don’t see how this works,” Lakner said.

The analyst said A&F seemed to be losing business to lower-price competitors, including its Hollister brand, over the past year or so. “I don’t see the solution being to move to higher price points, especially when you look at when they generated positive comps in January of 2004 and 2003,” which were the promotional sales months, Lakner said.

She also questioned how a higher price-point strategy could compete with A&F’s new concept, set to open in August.

The prototype concept appears to be targeting the post-collegiate demographic. If developed into a third leg for the retailer (with the Hollister leg positioned against Old Navy), the new concept takes aim at J. Crew and Banana Republic. That pits Jeffries up against Millard Drexler who is in the middle of repositioning the J. Crew brand.

“As they move into higher price points and move away from Hollister, does it move [A&F] closer to whatever this new concept is?” Lakner asked. “Does this concept have prices that are even higher? I am just afraid [the company] is jumping out of the frying pan and into the fire, from a competitive standpoint.”

Although management at A&F could not be reach for comment, it’s apparent that they are keeping the concept store close to the vest. In the conference call, Jeffries said little about the prototype, which will be headed by Carole Kerner, former president of Donna Karan and DKNY Women.

Kerner was named president of the DKNY women’s business, a division of Donna Karan International in 1998, succeeding Mary Wang, who went on to serve as president of Emanuel/Emanuel Ungaro.

Prior to that, Kerner served as senior vice president and general merchandise manager of women’s apparel at J. Crew’s mail order business. WWD reported in 1998 that Kerner “successfully repositioned women’s apparel as the dominant force in J. Crew’s mail order business.”

Kerner also served as president of Calvin Klein Women’s Sport in addition to holding several posts at Warnaco. She began her career at Macy’s New York.

It’s important to point out that Kerner took the helm at DKNY when the company said it would lower prices on key items to stimulate sales.

Brian Tunick, a retail analyst with J.P. Morgan, wrote in a research note Wednesday that while the higher price point positioning at A&F “should help to drive additional sales volume,” he is concerned that this “strategy will only help to further alienate the average A&F shopper from the brand.” Tunick said although there’s a core group of college-age consumers who might be willing to pay premium price points, he questioned if that group would be able to drive enough sales volume to counter any potential traffic declines from consumers turned away by higher prices.

In the investor call, Jeffries seemed optimistic about luring consumers with fatter wallets. “We have to offer more aspirations to attract customers,” he said. “They might have gone to Sony or some nonapparel pursuits.”

Jeffries told investors the premium price tier will be within the brand’s core classifications, but at higher price points that will be added on top of the current price points. “We are not abandoning the current price points, but we are adding a level to them in the existing classifications,” he said.

Jeffries declined to say what percent of the mix will hold premium prices, but said it would be an important stake, and it would pick up over the course of the year.

TOUGH COMPS
A&F Same-Store Sales
% Change Year over Year

Jan. ’04	2
Dec. ’03	-13
Nov. ’03	-13
Oct. ’03	-14
Sept. ’03	-1
Aug. ’03	-11
July ’03	-11
June ’03	-5
May ’03	-7
April ’03	-3
March ’03	-10
Feb. ’03	-4
Jan. ’03	3