Abercrombie sees margins rising, to close more U.S

Wed Feb 15, 2012 1:00pm EST

Customers leave an Abercrombie & Fitch store at South Park mall in Charlotte, North Carolina November 25, 2011. REUTERS/Chris Keane

Customers leave an Abercrombie & Fitch store at South Park mall in Charlotte, North Carolina November 25, 2011.

Credit: Reuters/Chris Keane

(Reuters) - Abercrombie & Fitch Co (ANF.N) said on Wednesday it expects its gross margins to recover "significantly" this fiscal year, helped by easing cotton costs and rising sales overseas, sending shares up 11 percent.

The clothing retailer, which caters primarily to teens and young adults, also told analysts on Wednesday it was closing more underperforming U.S. stores than expected.

"While sacrificing some volume, the bigger benefit is higher profitability," Jefferies & Co analyst Randal Konik said in a research note.

The shares took a hit earlier this month when Abercrombie gave a disappointing 2012 forecast, hurt by discounting.

Abercrombie, which competes with chains such as American Eagle Outfitters (AEO.N), Aeropostale Inc (ARO.N) and Gap Inc (GPS.N) said the need to slash prices during the competitive holiday season coupled with higher cotton costs took a heavy toll on its gross margin.

But cotton prices have moderated, and rising sales internationally, where its profit margins are higher than in U.S. stores, would "support significant margin improvement" in 2012, Chief Executive Mike Jeffries told analysts on a call.

The company has been closing weak U.S. stores and said it has identified another 180 stores it plans to close by 2015, bringing the total closings to 300. In addition to its namesake chain, the retailer also operates the Hollister chain.

Abercrombie operates a total 1,014 U.S. stores, out of a companywide total of 1,092 across all its brands.

Jeffries told analysts that Abercrombie's best 250 U.S. stores have margins comparable to its international stores. International sales account for only a quarter of total sales, but they rose 63 percent in the fiscal year ended January 28, compared with a 10 percent jump domestically.

Gross margin, a gauge of how profitable sold goods are, fell 7.5 percentage points to 56.1 percent of sales during the holiday quarter.

Jeffries remains "cautious" about sales and pricing trends for the current fiscal year.

A warm winter has also hurt the retailer of preppy basics, as shoppers have not bought as many sweaters, fleeces and other winter gear as expected.

Heading into the holiday season, the company discounted heavily in the United States while raising prices at its international stores.

The chain reiterated its forecast given earlier this month of earnings per share between $3.50 and $3.75 with same-store sales flat, above the $3.47 analysts were expecting. But that forecast was lowered from its original outlook.

Shares rose $4.90, or 11 percent, to $49.80 in early afternoon trading.

(Reporting By Phil Wahba in New York, additional reporting by Nivedita Bhattacharjee in Chicago; Editing by Maureen Bavdek and Gunna Dickson)

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