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A&F Cautious on Outlook, Bullish on Expansion

A&F reported a lower-than-expected third-quarter profit that was impacted by lawsuit settlements, and it was cautious on the fourth quarter.

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NEW YORK — Despite its caution for the fourth quarter and a disappointing third quarter, Abercrombie & Fitch Co. is taking a bullish stance for 2005 on expansion. It expects to roll out about 13 Ruehl stores and go international with other divisions.

Chief executive Mike Jeffries said on a conference call that he’s pleased with Ruehl so far, but added: “It is skewing a little older in age than we targeted, which I think is a very healthy business [and a] healthy proposition for that brand in terms of the potential size.”

Ruehl, which targets consumers aged 22 to 30, was launched in September and currently operates three units, in Paramus, N.J., Tampa, Fla., and Chicago. Additional Ruehl stores will be opened in Detroit, Columbus, Ohio, the Washington metropolitan area and Denver in the first half of 2005. Five to eight more stores are expected to open through the end of next year as well.

On the international front, the company is planning to enter Canada by the end of fiscal 2005. Executives told investors on the conference call that Canada is the first step in an eventual international expansion including Europe, Asia and possibly Latin America.

In the third quarter, the retailer was hit with a one-time charge from the settlement of three class action diversity lawsuits, which cut net earnings by about one-third. However, total sales rose 17 percent. In the period ended Oct. 30, Abercrombie earned $40.1 million, or 42 cents a diluted share, including a charge of $32.9 million, or 22 cents, due to settlements for the lawsuits. The quarterly earnings were down 20.5 percent from a profit of $50.5 million, or 51 cents, a year ago.

Total revenues in the quarter increased 17 percent to $520.7 million, from $445 million a year ago, including a sales increase at Hollister of 85 percent. Same-store sales increased 1 percent, including a 2 percent decrease at Abercrombie stores, a 3 percent decrease in its kids’ business and a 13 percent increase at Hollister.

In the first nine months of fiscal 2004, net income was $122.6 million, or $1.17, up 8.4 percent from $110.8 million, or $1.11, a year ago. Total revenues in the nine months increased 16.3 percent to $1.3 billion, from $1.2 billion a year ago.

This story first appeared in the November 10, 2004 issue of WWD.  Subscribe Today.

In June 2003, three class action lawsuits were filed in San Francisco U.S. District Court alleging Abercrombie discriminated against Latinos, Asian-Americans and African-American applicants and workers.

Abercrombie said it signed a consent decree on Nov. 8 settling the lawsuits, in which it will pay about $50 million to the class and for related fees and expenses, resulting in the $32.9 million charge.

“We decided to settle this suit because we felt that a long, drawn-out dispute would have been harmful to the company and distracting to management,” said Bob Singer, chief operating officer of Abercrombie, in the conference call. The company will not comment on the nonfinancial terms of the agreement until it has been reviewed by the courts.

The New Albany, Ohio-based company reiterated its cautious stance on the holidays and forecast fourth-quarter earnings and same-store sales to be flat with last year on an expected total revenue increase of 12 percent. In last year’s fourth quarter, the company posted net income of $94.3 million.

“While we are very pleased with the recent improvement in our sales trends, we hesitate to predict the holiday sales level,” said chief financial officer Sue Riley on the call. “We do not intend to anniversary [last year’s] promotions this year and therefore remain cautious about our sales volume.”

Riley forecast inventories to be down 15 percent at the end of the fourth quarter.

Abercrombie expects to open a 17,000-square-foot flagship on Fifth Avenue and 56th Street here in the fall of 2005. Singer also said the company will expand to an additional 12,000-square-foot space above its existing location in Los Angeles at the Grove at Farmers Market, thus giving the company two flagships “in the media capitals of our country.”

Hollister is still seen as a big area of growth for the company, which Jeffries said should reach $500 million in sales by fiscal year-end. Also on deck is remodeling plans to switch certain underperforming abercrombie kids locations to the company’s higher-performing Hollister concept in the next 12 to 18 months, management said.

Hollister, Jeffries said, “has surpassed the industry-leading operating margin of the adult business Abercrombie & Fitch.”

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