UPDATE 3-Abercrombie posts loss; sales surprise

Fri Aug 14, 2009 1:03pm EDT

Related Topics

* Q2 loss 30 cents; revenue fell 23 percent

* Analysts see Ruehl closure helping profits

* Company optimistic about international expansion plans

* Shares up 4.4 pct (Recasts throughout; adds analyst comments, byline)

By Dhanya Skariachan

BANGALORE, Aug 14 (Reuters) - Abercrombie & Fitch Co (ANF.N) posted a quarterly net loss on Friday, but revenue was better than expected, helping to send the teen apparel retailer's shares up more than 4 percent.

Investors were also encouraged that Abercrombie will benefit from the exit of its money-losing Ruehl chain.

Abercrombie, which runs its namesake stores and the Hollister and Gilly Hicks chains, decided to pull the plug on Ruehl in June and focus on its core labels.

"There is a sense that next year there can be pretty big earnings tailwinds from ...the closure of Ruehl," Brian Sozzi at Wall Street Strategies said.

Although Abercrombie posted a net loss in the latest second quarter, at least three analysts said the company's results would have topped their estimates if costs related to the exit of Ruehl were excluded and a normalized tax rate of 38 percent was assumed.

If you strip the expenses related to the closure of the Ruehl concept and the losses at the chain, Abercrombie would have posted a profit of 8 cents a share, beating Street expectations of a loss of 7 cents, Cowen & Co analyst Laura Champine told Reuters.

Revenue fell 23 percent to $648.5 million. Analysts on average were expecting $645.7 million, according to Reuters Estimates.

Analysts also lauded Abercrombie's efforts to keep a lid on costs by better management of inventory.

The company's inventory levels were down 30 percent at the end of the quarter, outpacing the 23 percent sales decline.

"This should help markdown pressure in the third quarter assuming inventory has now been planned in line with sales trends," UBS analyst Roxanne Meyer said in a note.

Same-store sales fell 30 percent in the quarter, hurt by double-digit declines at all chains.

CACHET SLIPPING

The retailer recorded a net loss of $26.7 million, or 30 cents a share, in the second quarter, compared with a net profit of $77.8 million, or 87 cents a share, a year earlier.

As recently as a year ago, Abercrombie was the most popular clothing store in the mall among teens and college-age students, despite it having higher prices than rivals.

Yet as the economic downturn deepened, many shoppers turned to less expensive rivals such as Aeropostale Inc (ARO.N), American Eagle Outfitters Inc (AEO.N) and Forever 21 as Abercrombie chose not to lower its prices.

But after months of sales declines, the company has slowly begun to discount or lower the starting ticket prices on some items to address the consumer aversion to high prices in the downturn.

"Abercrombie's biggest hurdles are behind it and with efforts underway to increase fashion component, deeper price reductions for next 12 months and selected store closures, we see improved profitability in 2011 and beyond," Standard & Poor's equity analyst Marie Driscoll wrote in a note.

Abercrombie shares have fallen about 39 percent in the past year, but its opportunities for international expansion are often cited by analysts as a long-term growth driver.

Besides more than a thousand stores in the United States, the company operates a handful of stores in Canada and one flagship Abercrombie & Fitch store in London.

The company said it remained on track to open three international flagship stores in fiscal 2009, including two stores in Milan and one outlet in Tokyo.

Abercrombie also remains on track to open 10 mall-based stores in the period, including one Abercrombie store in Canada and seven Hollister stores in Britain. It also plans to open one Hollister store in Germany and one in Italy.

Abercrombie shares were up $1.43 at $34.39 in midday trading on the New York Stock Exchange. (Reporting by Dhanya Skariachan in Bangalore, additional reporting by Alexandria Sage; editing by Steve Orlofsky and Andre Grenon)

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