Abercrombie & Fitch reports profit in 2nd quarter on revenue jump; plans to close 60 stores

Tuesday, August 17, 2010

A&F returns to 2Q profit; to close 60 stores

NEW YORK — Preppy retailer Abercrombie & Fitch Co. returned to a second-quarter profit as its strategy of lowering some prices boosted sales.

But its shares fell 9 percent as investors worried about the company’s gross margin eroding and its inventory growing.

The company, which has struggled during the down economy, said Tuesday that it will close 60 stores in the U.S. in 2010 as it expands internationally.

Abercrombie & Fitch Co., based in New Albany, Ohio, has lowered some prices to compete with Aeropostale Inc. and American Eagle Outfitters Inc. for teen dollars. CEO Mike Jeffries said in a call with analysts that its average unit retail price was about 15 percent lower in the second quarter than a year earlier.

Lower sourcing costs helped compensate for the retail price cuts, but Abercrombie’s gross margin suffered — just as it said it predicted.

“Substantially, all of the promotions we ran during the quarter were planned in advance and were driven by our expectation that they would be effective in driving sales productivity and gross profit dollars,” Jeffries said. “As we said at the beginning of the year, we are willing to tolerate some gross margin rate erosion in the near term to accomplish that.”

Also worrying investors was a 47 percent increase in the company’s inventory. Many retailers have lowered inventory in an effort to avoid markdowns, but CFO Jonathan Ramsden said the increase was necessary to avoid being understocked in the fall.

“We believe this is necessary to correct for the fact that we were significantly underinventoried and below presentation standards coming into the fall season last year,” he said.

Quarterly net income totaled $19.5 million, or 22 cents per share. A year ago the company lost $26.7 million, or 9 cents per share. Earnings were 24 cents per share excluding a charge for closing stores.

Analysts polled by Thomson Reuters, on average, expected a smaller 16 cents-per-share gain.

Revenue rose 17 percent to $745.8 million. Analysts expected $727.7 million.

Revenue in stores open at least a year rose 5 percent, but that improvement follows a 30 percent drop in last year’s second quarter. That comparison is considered a key indicator of a retailer’s performance because it excludes growth at stores that open or close during the year.

In the U.S., Abercrombie plans to open three Abercrombie & Fitch stores; three Abercrombie Kids stores; three of its surf-themed Hollister stores; two Gilly Hicks stores, which sell underwear and sleepwear; and five outlet stores.

It plans to close 60 domestic stores, mainly though lease expirations.

Internationally, the company plans to open namesake stores in Copenhagen, Denmark, and Fukuoka, Japan.

It plans to open 20 international mall-based Hollister stores, down from prior guidance of 25 stores.

In the fourth quarter, it will open a new namesake store in Canada and its first international Gilly Hicks store in the U.K.

Shares fell $2.58, or 6.9 percent, to close at $35.05 Tuesday. The stock has traded between $28.76 and $51.12 during the past year.

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