Abercrombie warns on sentiment, analysts unfazed

BANGALORE Wed Aug 17, 2011 12:08pm EDT

Shoppers hold bags with clothing purchases on the opening day of operations by retailers Abercrombie & Fitch outside their Paris store on the Champs Elysees May 19, 2011. REUTERS/Benoit Tessier

Shoppers hold bags with clothing purchases on the opening day of operations by retailers Abercrombie & Fitch outside their Paris store on the Champs Elysees May 19, 2011.

Credit: Reuters/Benoit Tessier

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BANGALORE (Reuters) - Teen retailer Abercrombie & Fitch (ANF.N) flagged trouble ahead for retailers during the crucial back-to-school selling season, saying it was "entering a period of greater uncertainty," sending its shares down as much as 7 percent.

Americans, rattled by the possibility of a double-dip recession, high unemployment and stagnant wages, saw consumer sentiment drop to its lowest point in more than three decades in early August.

"As we have discussed in the past, costing issues will certainly impact more significantly in the back half of the year and the consumer response to price increases remains unclear," Chief Executive Mike Jefferies said on a call with analysts.

Abercrombie, like most of its peers, has raised prices as it deals with high costs of raw materials which is eating into margins. In the second quarter, the company saw margins drop 150 basis points.

However, analysts vouched for the company, saying while macro issues could hurt all retailers, Abercrombie is still among the stronger performers.

"I think it's certainly a case of management continuing to be conservative, and (the comments were )not different from what we have heard from other retailers," analyst Dorothy Lakner of Caris & Company said.

Abercrombie beat quarterly estimates for a fifth straight quarter as teenagers, both in the United States as well as in international markets, readily shopped at its stores for jeans, T-shirts and other staples.

Lakner noted that the strong sales was not just a result of discounts or price rises, but came from the strength of its products and its affluent clientele.

"Abercrombie certainly appeals to a more affluent consumer and that definitely helps their sales," she said.

Recent company comments about consumer spending have showed the split between upper-income consumers who have jobs and are little affected by rising costs for food and other essentials, and lower-income shoppers who are struggling with stubbornly high unemployment and rising costs.

GLOBAL GROWTH

Sales at the company, which has been working on its image as the casual-clothes destination for teenagers, rose 23 percent to $916.8 million.

Besides its namesake stores, Abercrombie also runs the Hollister, abercrombie kids and Gilly Hicks stores.

International sales rose 74 percent to $231.9 million. Domestic sales rose 12 percent.

"In addition to the domestic recovery that is gaining momentum, we believe Abercrombie's international expansion will drive superior earnings growth for years to come," Nomura analyst Paul Lejuez said.

The company, which operates 1,073 stores under its various brand names, has been relying on international expansion to support long-term growth even as it closes weaker U.S. stores.

The preppy retailer, which has been steadily gaining market share from rivals like American Eagle Outfitters (AEO.N) and Aeropostale (ARO.N), has been running discounts ahead of the back-to-school season to gain traffic.

It expects to open 40 international mall-based Hollister stores this year, and close about 60-65 domestic stores as their leases expire.

JERSEY SHORE SCRAP

On Tuesday, the company said it had offered to pay Michael 'The Situation' Sorrentino, from MTV's The Jersey Shore, to stop wearing its product, in a bid to maintain its brand cachet.

The company said it was concerned that Sorrentino's association with the brand could cause significant damage to its image. The wildly popular reality show is often derided for the wild antics and over-the-top behavior of its cast.

Abercrombie shares were trading down $5.32 at $65.66 in morning trade on the New York Stock Exchange, while the larger S&P Retail Index .RLX was up 1 percent.

(Reporting by Nivedita Bhattacharjee in Bangalore; Editing by Saumyadeb Chakrabarty)

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