Abercrombie & Fitch: It's Just Not Cool Anymore


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Abercrombie & Fitch announced preliminary fourth quarter results this morning, guiding for earnings substantially below Wall Street estimates and sending shares down more than 11 per cent in pre-market trading. The New Albany, Ohio, teen retailer said it expected to post earnings per share of $1.10 to $1.15, under consensus analyst estimates of $1.58. 

Top line results for the period were $1.33 billion, as comparable store sales remained flat against last year’s numbers.

“Our sales for the quarter were below expectations in a highly promotional environment, and our results were further affected by all-time high cotton costs,” Abercrombie Chief Executive Mike Jeffries said. “We remain cautious on near-term sales trends; however, we are confident that we are on track with our assortment and our long-term strategy, and hope to see improvement as 2012 progresses.”

Perhaps most worrisome to investors were negative comps recorded at the company’s Canadian, European and Japanese flagships, which are generally seen as the main driver of growth.

Abercrombie has been able to charge considerably higher prices at flagships overseas, as the U.S. moved to a highly promotional environment. However, early signs showed that the company’s ability to maintain premium pricing overseas was hampered.

During the quarter, total international sales including sales from its website, surged 62 per cent to $367 million, while U.S. results increased some four per cent to $962 million.

“Across all brands men’s and women’s comps were similar for the quarter,” the company said in a statement. “Sweaters fleece and outerwear performed below company expectations.”

The company has had difficulty raising prices in the U.S. During Abercrombie’s ascent, it piloted both Ruehl stand-alone stores, to target men and women aged 25 to 34, and an Ezra Fitch line of jeans, which retailed about $100 higher than regularly priced jeans in its mainline stores. Both concepts were pulled after poor interest and the inability to generate strong returns.

Abercrombie has faced intense competition in the teen market, as higher priced retailers like Rugby, Brooks Brothers and Polo Ralph Lauren — which owns the Rugby brand — compete for a younger audience. Starting prices for women’s dresses at Rugby retail slightly above Abercrombie’s, and the brand appears to be making strong inroads in the college market.

At the end of its second quarter Rugby, which could become the greatest threat, operated some 15 stores, in similar markets as Abercrombie & Fitch storefronts. At the end of third quarter, there were 316 mainline Abercrombie locations, although the retailer expected to close a number.

Less expensive rivals, like Aeropostale and American Eagle have also made inroads as the economy gyrated lower. During the holiday months of November and December, American Eagle saw same-store sales jump 12 per cent from year-ago levels.

Today’s earnings report pushed Jeffrey Klinefelter of Piper Jaffray to cut his 12 month price target to $54 from $70, on the disappointing retail results.

Shares have traded lower over the past several months, after the company first noted weak European sales during its third quarter. The stock is now 47 per cent below a $78 peak set last summer.

The company will announce quarterly results on February 15, 2012 before the opening bell. 

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