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A&F Posts 13% Net Gain, Eyes U.K. Growth

Abercrombie & Fitch Co. is weathering the tough economic climate and is bullish on expansion, particularly overseas with A&F and Hollister.

Abercrombie & Fitch Co. is weathering the tough economic climate and is bullish on expansion, particularly overseas with A&F and Hollister.

However, the retailer has become more cautious about expanding one of its newer formats, Ruehl. Executives said the company would “moderate” Ruehl openings this year.

After posting 9 and 13 percent net income gains for the fourth quarter and 2007, respectively, officials from the youth-oriented retailer said Friday that they were scouting high street sites overseas for A&F flagships in Milan, Copenhagen and Paris, as well as Japan, where there is one already under construction on Tokyo’s Ginza, set to open late next year.

In addition, overseas sites in shopping centers for Hollister are being pursued and a prototype Hollister flagship is scheduled to open in Manhattan’s SoHo, on the southeast corner of Houston Street and Broadway, in spring 2009.

With the A&F brand, “we look to a lot of flagship openings in 2010,” said Michael Kramer, executive vice president and chief financial officer, during Friday’s conference call. Confidence continues to grow following A&F’s successful launch of a London flagship last year.

This year will be a big growth period in the U.S., with $300 million earmarked to open 67 Hollisters, 17 abercrombies, four A&F stores, six Ruehls and 16 Gilly Hicks, thereby growing square footage by 11 percent.

Four Hollister (non-flagship) stores in the U.K. will open this year, as well, marking the brand’s entry into Europe.

During the call, the 22-unit Ruehl division, appealing to the postcollege crowd in their mid-20s, got a mixed review. “It’s not a proven concept yet. We will moderate the pace of new store openings,” Kramer said, adding that Ruehl has never been viewed as a huge growth vehicle — 150 stores maximum in the U.S.

However, he also said the chain is nearing profitability and achieved gross margin gains and reduced operating costs last year. “We believe strongly in Ruehl. Mike Jeffries [A&F’s chairman and chief executive officer] strongly believes in Ruehl,” Kramer stated.

Overall, the corporation owes its success to trend-right merchandise, productivity gains without sacrificing margins, distinctive store experiences, sex appeal and the continued popularity of the A&F and Hollister brands. A&F targets an 18- to 22-year-old audience, Hollister targets 14- to 18-year-olds and abercrombie caters to seven- to 14-year-olds.

“Our brands represent highly productive, consistent businesses that are the result of an unyielding focus on merchandise quality and customer experience,” Jeffries said. “We continue to make strategic investments in the business to sustain and to enhance brand quality and to support future growth, both domestically and internationally.”

In the fourth quarter, the company posted net income of $216.8 million and earnings per share of $2.40 for the 13 weeks ended Feb. 2, compared with $198.2 million and $2.14 in the year-ago period. Sales increased 8 percent to $1.23 billion; comparable-store sales decreased 1 percent.

For the year, net income reached $475.7 million, or $5.20 a share, versus $422.2 million and $4.59 the previous year. Sales grew 13 percent to $3.75 billion from $3.32 billion.

By division in the quarter, A&F increased sales by 4 percent to $522.4 million, while comps increased 1 percent. At abercrombie, sales increased 11 percent to $159.8 million, while comps fell 3 percent. Hollister increased 11 percent to $530.9 million and decreased 2 percent on a comp basis. Ruehl increased 16 percent to $15.6 million, but comps fell 19 percent.

No results are available yet on Gilly Hicks, the intimate apparel division launched last month in the Natick Collection in Massachusetts, the Smith Haven Mall on New York’s Long Island and the Mall of America in Bloomington, Minn. “It’s too early to talk in-depth. We are extremely excited with how it’s come out of the gate. It’s exceeded expectations,” Kramer said. Sixteen Gilly Hicks openings are set for this year; 17 for 2009.

Operating income for the fourth quarter increased 9 percent to $337.1 million compared with $308.8 million last year. For 2007, operating income was $740.5 million versus $658.1 million the previous year, an increase of 13 percent.

The company expects earnings per share for the first half of fiscal 2008 in the range of $1.61 to $1.65, or 5 to 8 percent above the first half of fiscal 2007. Comp-stores sales are projected at a negative 1 percent for the first half, consistent with the fourth-quarter trend.

Abercrombie’s specialty empire consists of 355 A&F stores, 201 abercrombies and 447 Hollisters, as well as 22 Ruehls and three Gilly Hick units in the U.S. Abroad, there are three A&F stores and three Hollisters in Canada, and the A&F flagship in London.