Abercrombie Reports Another Weak Quarter, but Sees Recovery in 2010

Abercrombie & Fitch (ANF) posted another down quarter, but management vowed the retailer has bottomed out and will begin showing improvement this year, thanks to expansion abroad and more belt-tightening at home.

The parent of Abercrombie & Fitch and Hollister reported earnings of $47.5 million, or 53 cents per share during the quarter, down 30.6% from $64.8 million last year. After factoring out the closing of the Ruehl chain last year, earnings were 91 cents per share, beating analysts' expectations of 87 cents per share, according to Thomson Reuters' consensus estimate. For the full year 2009, the company reported $300 million in net income for the year, and no earnings per share, compared to 2008 earnings of $272.3 million, or $3.05 per share.But Abercrombie's management said the company is turning things around and saw some improvement in January, the last month on its fiscal year. Sales began to improve, thanks to a post-holiday clearance and redemptions of gift cards it gave away in a holiday promotion. It posted an 8% increase in comparable sales during the month.

"We expect 2009 to be a trough year," Chief Financial Officer Jonathan Ramsden told analysts in a conference call.

Improving Margins

Abercrombie is trying to return to its historic 20% operating margin in the long term, and it's projecting to be back at 15% in 2012, he said. That will be achieved by a combination of improving sales and cutting costs domestically while expanding overseas, where Abercrombie sales are flourishing. Ramsden would not give more short-term margin forecasts, but Morningstar is projecting it will rise to 10% this year, from 4% in 2009.

While domestic sales were down 12% during the quarter to $793.1 million, international sales were up 86% to $142.9 million and hit $256 million for the year. Abercrombie opened an Asian flagship in Tokyo in December and expanded Hollister in Europe during the fourth quarter. The company has plans to expand further in both Japan and Europe and add another 30 Hollister stores abroad in 2010, including at least two new countries.

Ramsden said the international stores are showing higher operating margins than the domestic ones, so that expansion should be an important factor in the increased operating margins going forward. Meanwhile, Abercrombie has more subdued store openings planned in the U.S.: Two new Gilly Hicks stores, three Hollister openings and one for Abercrombie & Fitch.

Pruning the Herd

Abercrombie will be looking at closing U.S. stores that are causing a drain on its profits. Ramsden wouldn't say how many, but noted that some 95 stores have been identified as "less healthy than the remainder" but they could be improved by a series of productivity-improvement measures being planned. The stores' fate could be influenced by their performance this year, he said.

The analysts had hoped Abercrombie's fourth quarter would show signs that the retailer's fortunes had bottomed out. Investors have worried that Abercrombie was losing customers by refusing to discount, while mall rivals such as Aeropostale (ARO) and American Eagle Outfitters (AEO) were drawing away its customers with promotional merchandise such as graphic t-shirts.

Abercrombie remains careful not to cheapen its brand by doing wholesale promotions, but it is working on balancing lower opening prices with targeted promotions like the holiday gift card giveaway, said CEO Mike Jeffries. Merchandisers have been working with manufacturers to bring down costs so stores can afford to lower some prices without damaging the profit margin, he said.

Abercrombie will never be a promotionally driven company, Jeffries argued. But he admitted: "We're getting better at figuring out something that was completely alien to us 18 months ago."
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