UPDATE 3-Abercrombie & Fitch hires Goldman Sachs-source

Wed Sep 12, 2012 6:10pm EDT

* Goldman Sachs hired to ward off investor pressure

* Abercrombie shares up 5 percent

By Nivedita Bhattacharjee and Olivia Oran

Sept 12 (Reuters) - Teen clothing retailer Abercrombie & Fitch Co has hired Goldman Sachs Group Inc as it works to ward off pressure from investors, a source familiar with the matter said on Wednesday.

The source would not specify the nature of the pressure or name the investors, but CNBC said that Goldman was hired to help keep activist Relational Investors at bay.

Abercrombie & Fitch sales have been falling as the chain's preppy style has lost favor in a segment dominated by so-called fast-fashion retailers. Rivals such as Forever21 offer more-affordable clothes for more fashion seasons, while peers such as American Eagle Outfitters have done a better job of turning over inventory and styles.

"When you deal with such a specific clientele, they can be your best friend one moment then turn against you the next as trends change," said Jack Ablin, chief investment officer of Harris Private Bank in Chicago.

"The problems with Abercrombie are probably contained within their own walls, though, as the retail sector in general continues to hold up," he said.

Investor Michael Bigger of trading firm Bigger Capital, who owns Abercrombie shares, said news that it hired Goldman gave the stock a short-term boost. He said he was betting on a bid at a multiple of 15 times for the stock should there be buyout offers.

Abercrombie is expected to earn $2.53 a share in 2013, according to Thomson Reuters I/B/E/S.

The company reported that sales at stores open at least a year fell 10 percent during its fiscal second quarter. While sales are hurting at home, the company has more stores in Europe than American Eagle and Aeropostale Inc, another rival, but said it has frozen plans for new international stores.

In Europe, Abercrombie has had to compete with Sweden's H&M , the world's second-largest fashion retailer, whose sales grew in July for a third straight month.

"While management has been great in the past it hasn't been as quick as it should have been in being fast and changing," said Morningstar analyst Jaime Katz.

She said it was also late in the game to be backing off on European expansion and making changes to sourcing and manufacturing networks.

In August, Abercrombie said it was increasing sourcing from the United States and Central America, which are typically more expensive than Asia, to shorten the time between placing orders and getting clothes into stores, in a bid to compete with fast-fashion retailers such as H&M.

Abercrombie shares closed up 5.4 percent at $37.9 on the New York Stock Exchange.

San Diego-based Relational Investors reported a stake of 3.8 percent of Abercrombie's shares as of the end of June. Founded by Ralph Whitworth, the firm manages around $6 billion. Relational has a track record of buying stakes in companies in order to agitate for change.

In 2010, Whitworth criticized biotechnology company Genzyme Corp for spending too much on acquisitions and not enough on its core business. He later joined the board and helped lead the company to a $20.1 billion sale to French pharmaceutical maker Sanofi SA.

Whitworth has also pushed for change in defense firm L-3 Communications Holdings Inc and Home Depot Inc. It also recently disclosed a roughly $600 million stake in PepsiCo Inc.

Relational could not be immediately reached for comment.

The source was anonymous because the talks are confidential. Goldman Sachs and Abercrombie & Fitch were both not immediately available for comment.

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