Abercrombie’s profit sinks as fashions evolve
Wednesday, August 15, 2012
NEW ALBANY, Ohio (AP) — Abercrombie & Fitch Co. is struggling to sell its preppy jeans and T-shirts at a time when fashion trends are shifting and a rough economy has left teens around the world on tighter budgets.
The New Albany, Ohio-based company said Wednesday that its profit plunged by more than half in the second quarter as a key sales figure fell 10 percent. In the U.S., the figure fell for the first time since 2009.
The results weren’t as bad as analysts feared, however, after the clothing retailer warned just two weeks ago of weakening sales and slashed its forecast for the year. The company on Wednesday also laid out plans for updating its fashions more nimbly going forward, and noted that revenue at stores open at least a year has started to stabilize in the past few weeks. Its shares rose almost 9 percent to $35.23.
In a conference call with investors, Chairman and CEO Mike Jefferies blamed Abercrombie’s high inventory levels for preventing it from chasing trends more quickly.
“Did we miss the past two quarters because our assortment was too narrow? Because we were late on trends? I believe so,” he said.
But Jefferies said Abercrombie now plans to keep its inventory levels leaner and shorten buying times to give it more room to more effectively “chase and react” to trends.
The company also said it will put a hold on opening any additional flagship stores and scale back on the number of locations it opens abroad, in part to prevent stores in international markets from cannibalizing sales from each other.
Despite the disappointing results, Jeffries said he thinks there are opportunities for the company to do better and that he’s confident in the global appeal of Abercrombie’s brand, citing the successful opening of a store in Hong Kong last week.
Jefferies also said other factors such as the challenging global economy were out of the company’s control. But analyst Brian Sozzi of NBG Productions questioned the validity of blaming economic trends.
“The fact is teen clothing preferences have moved away from Abercrombie’s American prep aesthetic,” Sozzi said. He noted that Abercrombie’s inventory levels remain high, which might continue to limit its ability to update its clothing.
Abercrombie & Fitch, which was forced to cut prices during the recession, is facing a new round of challenges as it copes with the government debt crisis in Europe and a stubbornly challenging environment at home. The company announced in June that it was closing 180 U.S. stores over the next few years. The chain had already closed 135 underperforming U.S. stores in two years.
In the latest quarter, the company said revenue at stores open at least a year fell by 10 percent. In the U.S., the figure fell by 5 percent. The metric is a key gauge because it strips out the impact of newly opened and closed locations.
For the three months ended July 28, Abercrombie & Fitch Co. earned $15.5 million, or 19 cents per share. That’s down from $32 million, or 35 cents per share, a year earlier.
Analysts expected earnings of 17 cents per share, according to FactSet. Two weeks ago, the company had warned that it expected profit to come in at 15 cents to 18 cents per share.
Total revenue climbed 4 percent to $951.4 million, but fell short of Wall Street’s $954.9 million estimate.
Higher costs ate into gross profit and an increase in marketing and administrative expense reduced operating income. The tax rate for the quarter rose to 38.9 percent, from 30.7 percent a year ago.
Abercrombie said earlier this month that it now expects to earn between $2.50 and $2.75 per share for the year. It had previously forecast a profit $3.50 and $3.75. For the full year, it expects revenue at stores open at least a year to be down 10 percent.
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