* Sees Q1 drop in comp sales, loss
* CEO has set up team to find ways to cut costs
* Shares down 6.4 percent
By Phil Wahba
Feb 22 (Reuters) - Abercrombie & Fitch Co on Friday reported a drop in comparable sales during the holiday quarter on weakness at its overseas stores and in its Hollister chain, and the youth retailer warned of a sluggish start to the new fiscal year.
Shares were down 6.4 percent to $45.96 in midday trading.
Business at Abercrombie & Fitch has slumped amid intense competition for young shoppers' limited budgets from rivals such as American Eagle Outfitters, Gap Inc, and Forever21. The company's plan to build out flagship stores in Europe has yet to pay off.
Sales at stores open at least a year and online fell 1 percent during the quarter that included the Christmas period, and Abercrombie said it expects comparable sales this current quarter will again fall and lead to a loss for the period.
"It's been two full years of bad news," said Morningstar analyst Jaime Katz, noting that investors are getting anxious to see improvement.
Comparable sales were flat for the namesake chain and fell 2 percent at Hollister last quarter. They were little changed in the United States and down 3 percent abroad. Online sales were the only sector where Abercrombie is showing growth.
Abercrombie's profit got a boost from lower cotton costs and efforts to contain other costs. Chief Executive Mike Jeffries announced the creation of a special team led by two senior executives, helped by an outside firm, to find ways to lower expenses and lift operating margins.
"Our profitability is not where it needs to be," Jeffries said on a conference call with Wall Street analysts. He also said that a tough economy would continue to weigh on his customers this year.
The company has also undertaken its first global market study to better understand how shoppers view Abercrombie compared to its rivals and improve its ability to compete.
Overall sales rose 10.5 percent to $1.47 billion for the 14 weeks ended Feb. 2, boosted by an extra week compared to the year earlier period. The result was below the $1.49 billion Wall Street was projecting, according to Thomson Reuters I/B/E/S.
A decrease in product costs like cotton sent its gross profit margin up 3.9 percentage points to 63.4 percent of sales.
Abercrombie announced it was changing how it accounts for merchandise it will mark down permanently.
Previously, the company lowered the value of its inventory and took a charge when the selling price was lowered permanently. Now, it won't reduce the value of inventory on its books unless it expects to sell the merchandise below cost.
Under the old accounting method for inventory, the company earned $173.2 million, or $2.15 per share, for the 14-week period, compared with $19.6 million, or 22 cents per share, a year earlier for a 13-week period.
Excluding an impairment charge, Abercrombie had a profit of $2.21 a share, 25 cents better than expected, according to Thomson Reuters I/B/E/S.
The company raised its quarterly dividend to 20 cents per share.