Margin, inventory concerns weigh on Abercrombie shares

BANGALORE (Reuters) - Discounts at Abercrombie & Fitch Co (ANF.N) drew more customers and lifted sales, but the resulting hit to margins, coupled with rising inventories, pushed the retailer's shares down 8 percent Tuesday morning.

On a conference call with analysts, Chief Executive Mike Jeffries said the company is ready to take a hit from margin erosion as it keeps discounting to gain traffic.

The once-trendy teen retailer has endured a long slump of weak sales, but a recent bout of discounting helped it post one of the sector's best same- store sales results in July.

However, these promotions have eaten into the company's gross margin, which shrunk 150 basis points during the second quarter.

Apparel companies, including rival Aeropostale (ARO.N) and Gap Inc (GPS.N), report results on Thursday, amidst fears that higher-than-usual discounting coupled with sourcing pressures right before the back-to-school season does not bode well for the companies.

For many specialty apparel retailers, which have often been criticized for the sameness of their products, pricing becomes an important means of drawing shoppers.

Moreover, Abercrombie said inventory at the end of the second quarter was up 47 percent at cost -- more than what some analysts were expecting.

In contrast, Urban Outfitters Inc's (URBN.O) strong results on Monday were anchored by fewer discounts, which held up margins, and fresh fashions that kept customers coming to its stores.

"(Abercrombie is) managing sourcing costs better than most, but the inventories are higher than what people are looking for," Amy Noblin, analyst with Weeden & Co, said.

"This is not a very forgiving market."

SLOWER STORE GROWTH

Abercrombie, whose chains include Abercrombie & Fitch, Hollister and its children's unit abercrombie kids, has also been scaling down on store growth, and shutting underperforming shops.

On Tuesday, it said it plans to shut about 60 domestic stores over the fiscal year, and open 20 international mall-based Hollister stores -- down from the prior estimate of about 25 stores.

Analyst Noblin said the company has to make sure they have a strong pipeline of deals for next year, but between the slower store growth, higher inventories and rising expenses, expectations for the back-half of the year was likely to go down.

For the second quarter, Abercrombie earned $19.5 million, or 22 cents per share.

After adjusting for charges related to store closures, the teen retailer earned 24 cents a share, while analysts on average had been expecting 16 cents per share, according to Thomson Reuters I/B/E/S.

The company had earlier said quarterly sales rose 17 percent to $745.8 million.

The New Albany, Ohio-based company said domestic sales, which account for the majority of its revenue, rose 8 percent to $612.6 million.

The company's shares, which have lost about 27 percent of their value since they touched a high of $51.11 in April, were trading down at $34.53 Tuesday on the New York Stock Exchange.

(Reporting by Nivedita Bhattacharjee in Bangalore; Editing by Don Sebastian, Anthony Kurian)