February 26, 2014 / 12:51 PM / 5 years ago

Abercrombie beats estimates, to cut prices this year

(Reuters) - Teen apparel retailer Abercrombie & Fitch Co (ANF.N) said it would lower prices to deal with intense competition, after discounts in the holiday season helped quarterly revenue fall less than expected.

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

Abercrombie’s shares rose almost 12 percent on Wednesday after the company also forecast a better-than-expected profit for the year and hiked its share buyback plan.

The company and its rivals, Aeropostale Inc ARO.N and American Eagle Outfitters Inc (AEO.N), have lost shoppers to cheaper and trendier “fast fashion” chains such as Forever 21, H&M and Inditex’s (ITX.MC) Zara.

Still, while Abercrombie said in November it would expand its merchandise to include shoes and larger clothes sizes for women, it did not cut prices. Instead, it said it planned to hike prices from this year.

The company on Wednesday reversed its stand and said it would lower prices by cutting merchandise costs after reporting a fall in same-store sales for the eighth straight quarter.

“We need to be competitive on price, particularly female fashion, and we will aggressively look to reduce average unit cost,” Chief Executive Mike Jeffries said on a post-earnings conference call.

Abercrombie stripped Jeffries of his chairman duties late last month, bowing to investor pressure to reduce his control over the struggling company.

Abercrombie said it expected gross savings of at least $145 million in 2014 from cost-cutting initiatives, almost five times the amount it saved in 2013. The company said most of the cuts would be on operating expenses, with a smaller element included in gross margin.

“Gains in Abercrombie’s productivity and cost initiatives show some light at the end of the tunnel, ... we are once again warming up to the name,” Jefferies analyst Randal Konik said.

The company forecast profit of $2.15-$2.35 per share for 2014, higher than the analysts’ average estimate of $1.62 per share, according to Thomson Reuters I/B/E/S.

The forecast was realistic and could even prove conservative in the latter half of the year, Brean Capital analyst Eric Beder wrote in a note titled “The Long Road Back Begins”.

However, not all analysts were convinced that the price cuts would translate into higher sales.

Morningstar analyst Bridget Weishaar said the difference between the company’s forecast and analysts’ estimates was due to cost cuts rather than expected revenue growth. She said she remained cautious on the stock in the long term.

Abercrombie’s net income fell 58 percent to $66.1 million, or 85 cents per share, in the fourth quarter ended February 1.

Excluding one-time items, the company’s profit of $1.34 per share beat analysts’ average estimate of $1.03 per share.

Revenue fell 12 percent to $1.30 billion, but topped analysts’ average estimate of $1.26 billion. Same-store sales fell 8 percent in the quarter.

Abercrombie said it would buy back $150 million in stock in the current quarter, more than the $116 million in bought back in the whole of 2013. The company said it would buy back more shares over the year.

“We believe the company will remain shareholder friendly, in terms of returning cash to shareholders via share repurchases and dividends,” Beder added.

The company’s shares rose 9.7 percent to $39.49 in late afternoon trading on Wednesday on the New York Stock Exchange. The stock touched a high of $40.12 earlier.

Editing by Kirti Pandey, Joyjeet Das and Savio D'Souza

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