Abercrombie & Fifth Q4 Profit Up, But Sees Rocky Q1 Ahead

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Spring styles at Abercrombie & Fitch

Spring styles at Abercrombie & Fitch

New Albany, OH—Abercrombie & Fitch today reported a surge in its fourth quarter earnings as sales increased, but gave a disappointing 2013 fiscal year outlook.

For the quarter ended Feb. 2, the teen-oriented retailer reported a net profit of $157.2 million, or $1.95 a share, up from $45.8 million, or 52 cents a share, a year ago. The company said it changed its method of accounting for inventory from the retail method to the cost method. Moreover, the year-earlier period included 50 cents a share in asset impairment charges, among several other one-time expenses. Excluding impacts from the accounting change, write-downs and other items, earnings were $2.21, up from $1.12.

Revenue increased 11% to $1.47 billion. Analysts’ average estimate projected adjusted earnings of $1.96 on revenue of $1.49 billion.

Mike Jeffries, chairman/ceo, said, “Our record sales were in line with our guidance coming into the quarter, and our earnings significantly exceeded expectations due to a strong gross margin performance for the quarter, allied with continued tight expense control.”

Gross margin widened to 63.4% from 59.5% while total U.S. sales, including direct-to-consumer sales, were up 1% at $976.4 million, while international sales rose 34% to $492.2 million.

Comparable store sales remained flat in the United States and fell 3% internationally. Comparable direct-to-consumer sales increased by 17% compared to last year.

By brand, comp sales were flat for Abercrombie & Fitch stores, rose 4% for abercrombie kids, and fell 2% for Hollister Co.

For fiscal 2012, Abercrombie & Fitch’s net income under the retail method increased to $263.19 million, or $3.16 a share, from $127.66 million, or $1.43 a share, in the prior year. Excluding charges, adjusted earnings per share were $3.22, compared to $2.31 last year.

Under the cost method, net income for the year rose to $237.01 million, or $2.85 a share, from $143.93 million, or $1.61 a share, last year.

Q1 Comparable Store Sales in ‘High Single Digit Decline’?

Net sales for the year rose 8% to $4.51 billion. Analysts expected the company to earn $2.98 a share for the year on revenues of $4.53 billion.

Total comparable sales for the year, including direct-to-consumer sales, decreased 1%. Comparable store sales declined 5 percent, while comparable direct-to consumer-sales increased 24%.

Looking ahead to its fiscal 2013, Abercrombie forecast earnings per share in the range of $3.35 to $3.45 under the cost method of accounting for its inventory. Analysts’ estimate expects the company to earn $3.67 a share for the year.

The company also forecast a first quarter loss on a high single digit decline in comparable-store sales, in part because of the lack of clearance inventory. Analysts, however, were forecasting a profit of 16 cents a share.

Executives said, however, the company expects results to improve significantly in the second quarter.

“Our profitability is not where it needs to be,” Jeffries told analysts on a conference call. “We’ve made progress in our operating margins over the past couple of years, but they are still well below historical levels and that is despite the benefit of our highly profitable international business. This initiative is a major corporate priority.”

Jeffries said the company hopes to increase the average unit retail price domestically and said these initiatives could help bring the company’s operating margin back to a percentage in at least the low teens over the next few years.

The company also said plans to close 40 to 50 stores in the United States this year, primarily through natural lease expirations. But internationally, the company’s is opening its namesake flagship stores in Seoul and Shanghai and about 20 overseas Hollister stores, including the chain’s first one in the Middle East.