Abercrombie & Fitch (ANF.N) said it sees margins remaining weak in the key holiday season but backed its international expansion plans, spooking investors, who drove the teen retailer's stock down 14 percent Wednesday.
The preppy retailer had already lost nearly a quarter of its market value over the past two weeks, after it warned of slowing sales in Europe.
"If a company reiterates plans from a position of strength, such as Burberry (BRBY.L) did, it is one thing ... if you surprise with margin falls and with falls in your flagship stores, it is quite another," Rahul Sharma, managing director of investment management firm Neev Capital, said.
Earlier in the week, British luxury goods group Burberry reported strong profits and said it plans to stick to its ambitious expansion plans.
In the current quarter, Abercrombie's margins fell 360 basis points as fierce competition prevented it from raising prices to offset rising cotton and freight costs.
Abercrombie, which competes in a highly promotional teen retail space, said its average price per unit was flat ahead of the holiday shopping season.
Abercrombie Chief Executive Mike Jefferies, however, defended his stance on international expansion.
"If anyone is inclined to believe that a softening of our business in Europe this quarter -- in the face of severe macroeconomic headwinds -- is a major issue for our model, I think they are missing the forest for the trees," Jeffries said on a conference call with analysts.
The company said it plans to open three more of its flagship Abercrombie & Fitch stores this year in Dusseldorf, Brussels and Singapore on top of the two new stores already opened in Paris and Madrid. It also expects to open 40 international mall-based Hollister stores, of which 25 are already up.
"The international story is not dead but there is a chink in the armor," Jefferies & Co analyst Randal Konik said.
"With the key Europe flagships comping negative in the third quarter and slowing trends at the Hollister stores, Abercrombie just can't escape the tough Europe macro environment facing lower tourism and traffic levels."
During the recession Abercrombie had lost out to rivals as it refused to cut prices to maintain brand equity, before eventually caving in to peer pressure.
But, over the past year, clothes makers and retailers took to increasing prices on their merchandise to battle higher costs of raw materials and freight.
"What people are fretting about is whether this brand is losing some of its attraction to European shoppers ... Abercrombie is over-estimating its own pricing power -- you can press that lever only so far," Neev's Sharma said.
While Abercrombie raised prices at its international stores, it discounted in America, wooing young clientele ahead of the holiday season.
"We chose to keep our average unit retails down in these stores, which, combined with double-digit cost increases, puts significant pressure on our gross margins," Chief Executive Jeffries said on the call.
Abercrombie, which also runs the Hollister, Gilly Hicks and abercrombie kids brands, earned $50.9 million, or 57 cents a share in the quarter, while analysts on average, were expecting profits of 71 cents a share, as per Thomson Reuters I/B/E/S/.
Abercrombie shares were down more than 13 percent at $48.30 in morning trade on the New York Stock Exchange. Rivals American Eagle Outfitters (AEO.N) and Aeropostale Inc (ARO.N) were up 4 percent and 3 percent, respectively.
(Reporting by Nivedita Bhattacharjee in Bangalore; Editing by Supriya Kurane)