CHICAGO (Reuters) - Abercrombie & Fitch Co (ANF.N) is scaling back store openings overseas in 2010, where it is seeing its best growth, and expects gross margins to continue to erode this quarter, sending its shares down 7 percent.
Investors were also concerned by the teen retailer’s inventory growth of 17 percent -- higher than sales growth of 14 percent in the first quarter.
“That’s going to pressure short term results if they do not have a material boost in sales,” said Brean Murray, Carret & Co analyst Eric Beder, who has a “sell” rating on shares. “That’s a red flag.”
Many on Wall Street have pointed to Abercrombie’s growth potential abroad, which currently makes up only 15 percent of total sales, as a bright spot. Overseas expansion could counter sluggish domestic growth, where above-average prices for Abercrombie’s clothing have alienated many customers.
The company trimmed its capital expenditures forecast, as it plans this year to open only 25 Hollister stores, its surf-inspired chain, from a prior target of 30.
“The big growth story is international and they pulled back a little on that,” Beder said, adding that the company planned to accelerate its flagship openings through 2012. “The Street looks on both those (inventory and international pullback) as a negative story here.”
Company executives said on a call with analysts that they are taking a harder stance scouting international locations and backed away from some spots, such as a mall in Munich, that did not meet their criteria. The company may close some underperforming U.S. stores.
U.S. sales rose 5 percent to $568.8 million in the fiscal first quarter ended May 1. International sales more than doubled to $119 million. At the end of the quarter the company ran 1,069 U.S. stores and 31 international ones.
Abercrombie posted a first-quarter loss of $11.8 million, or 13 cents per share, compared with a loss of $59.2 million, or 68 cents per share, a year earlier. The loss per share matched analysts’ average forecast, according to Thomson Reuters I/B/E/S.
Over the last 18 months, Abercrombie has lost U.S. market share to competitors such as Aeropostale Inc ARO.N, whose lower prices are more friendly to teens on a budget.
The company has been trying to add more fashionable items to justify higher prices, while lowering prices on more basic items. It plans to keep a “pretty high” level of promotions at Hollister.
Abercrombie reiterated its commitment to international expansion and said it could open about 15 flagship Abercrombie & Fitch stores in Europe and Asia through 2012, on top of plans to open such a store in Madrid in fiscal 2011.
It still plans to open Abercrombie & Fitch flagship stores in Copenhagen and Fukuoka, Japan this year, as well as a Hollister Epic store on New York’s Fifth Avenue.
It plans one Abercrombie & Fitch store in Canada this year and its first international Gilly Hicks store in the UK in the fourth quarter.
In the United States, it plans to open three Abercrombie & Fitch stores, two Abercrombie kids stores, three Hollister stores, two Gilly Hicks stores, and five outlets this year.
Abercrombie forecast fiscal 2010 capital expenditures of $200 million to $225 million, including $165 million to $190 million to build new stores and spruce up old ones, and about $35 million for technology and other projects.
In February, the company projected capital expenditures of $250 million to $260 million, including $215 million to $225 million for new stores, refreshes and remodels.
Reporting by Jessica Wohl, additional reporting by Alexandria Sage in San Francisco; Editing by Michele Gershberg, John Wallace and Matthew Lewis