By  on February 16, 2010

Abercrombie & Fitch Co. led off the fourth-quarter specialty store earnings season with a smaller profit decline than analysts expected and indications that it was getting more aggressive about keeping inventories in check.

Mike Jeffries, chairman and chief executive officer, said on the company conference call Tuesday that even though the retailer doesn’t “ever plan to be a promotionally led business,” it is “getting better at figuring out something that was completely alien” to it 18 months ago.

In the fourth quarter ended Jan. 30, gross margin fell to 63.5 percent of sales, versus year-ago gross margin of 64.5 percent, because of lower average unit retail and unplanned markdowns on spring product that is now slated to go straight to clearance or to outlet stores, according to the company.

“We’ve been through a difficult year, but we firmly believe it was a year in which we laid foundations for future success,” Jeffries said.

Throughout the recession, most analysts have pointed to A&F’s lackluster apparel assortment and high prices as glaring problems for the company, which has lost ground to more value-oriented competitors such as Aéropostale Inc. and the recently resurgent American Eagle Outfitters Inc.

Fourth-quarter profitability was hurt by costs associated with the closure of the 29-door Ruehl concept but still managed to exceed consensus estimates, helping shares to move up $1.40, or 4.1 percent, to $35.25 on Tuesday.

Net income for the New Albany, Ohio-based company dropped 30.6 percent to $47.5 million, or 53 cents a diluted share, compared with $68.4 million, or 78 cents a share, in the year-ago quarter. Stripping out a net loss from discontinued operations and noncash asset impairment charges, the firm reported earnings per share of 91 cents, 4 cents above the consensus estimate of analysts polled by Yahoo Finance.

Quarterly sales slid 4.6 percent to $936 million versus $980.8 million a year earlier. Comparable-store sales declined 13 percent, led by a 19 point drop at Hollister, followed by an 11 percent slide at its kids’ division and an 8 percent pullback at the flagship nameplate.

For the year, the retailer’s net income fell 99.9 percent to $254,000, or break-even on a per-share basis, versus $272.3 million, or $3.05 a share. Revenue declined 15.9 percent to $2.93 billion from $3.48 billion as it contracted 23 percent on a comp basis. On the apparel side, Jeffries said, the men’s business has a “clear identity” and is “performing well,” while the women’s division is making progress.

“Personally, I am more involved in the women’s product, and I am approaching this challenge with renewed energy and enthusiasm for improving this side of the business,” he said.

He cautioned the firm might close underperforming stores to enhance domestic productivity, even as it becomes more aggressive in its pursuit of international growth.

“The story is not a quarterly story, but a longer-term and international story,” said Jennifer Black, president of Jennifer Black & Associates, who noted that international sales could represent more than 50 percent of the business, up from current levels of “just north of 10 percent.”

While Black said this could compensate for the “lack of unit growth in the U.S.,” UBS retail analyst Roxanne Meyer wasn’t impressed by A&F’s results.

“We continue to look for signs of stabilization in the U.S. and greater conviction in the long-term operating model for international, which, while off to a strong start, in our minds isn’t proven yet,” she said.

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