A&F closes up Hong Kong shop amid falling profits

You might still remember the opening ceremony of Abercrombie & Fitch's Hong Kong flagship store in Central four years ago - the US fashion chain brought a hundred half naked male models from all over the world, and shook up the city - screaming women, stalled traffic and hot discussions on social media; it was all there.

Despite the screams it enticed in 2012, Abercrombie & Fitch announced last Friday that it will close its flagship store early next year.

A&F's four floor, 25,600 square feet boutique on Pedder Street in the city's Central business district, currently fetches HK$7 million per month. The store's lease is valid until 2019, but the company said an early closure will be "substantially complete" by the end of the second quarter of fiscal year 2017, and A&F will be paying a lease termination charge of HK$124 million during the fourth quarter.

"The closure of Abercrombie & Fitch’s flagship retail store in Central, Hong Kong feels like déjà vu following Forever 21’s recent news of the closure of its Causeway Bay flagship store set for next year," said Jack Chuang, partner, Greater China, OC&C Strategy Consultants. (Read more: Forever 21 to shut Hong Kong flagship store next August )

He told Marketing that the high level of rent incurred for such large flagship stores can only be justified if there is strong foot traffic and sales to build brand equity in a sustainable manner, for instance, between 2010 and 2011 when there was a heavy influx of Chinese tourists into Hong Kong. However, the flagship store's profits have been adversely impacted as Chinese tourist numbers decline.

"Brands will need to trade-off other marketing investments, such as digital marketing versus large flagship stores. Brands like Abercrombie & Fitch and Forever 21, which target younger and more digitally advanced consumers, need to realign their strategies based on the ever-changing consumer landscape in specific markets," he said.

The company also announced that it will shut down its A&F flagship store in Seoul in January 2017.

"These actions are part of the company's ongoing strategic review and are expected to drive economic benefit over time," the company said in a statement.

Executive chairman Arthur Martinez admitted that the brand had had to discount more than it wanted and that such intense promotions harm a brand longer term. "Weakness in A&F was compounded by under-performance of seasonal categories, which ultimately led to pressure on gross margin."

He added that the flagship and tourist locations continued to be a major headwind, and chain store traffic patterns remained negative.

"While we anticipate the A&F business will remain challenging through the balance of the fiscal year, we continue to move aggressively to evolve the brand across all channels through significant changes in product, customer experience and marketing. A comprehensive set of strategic and operational actions is being taken by an experienced team under new leadership, and we expect to see benefits as our efforts gain traction," Martinez said.

Meanwhile, another US fashion retailer American Apparel filed for its second bankruptcy protection in just over a year last week, following steep drop in sales amid intense competitive pressures, both online and offline. The brand filed its first bankruptcy in October 2015.

American Apparel chairman Bradley Scher said the brand will run its business as usual in the United States and this will have no noticeable effect on day-to-day operations.