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Abercrombie Hit by Higher Costs, European Slowdown

Specialty chain missed analysts' third-quarter expectations by a wide margin.

A shopper at an Abercrombie & Fitch Co. store.

Savvy, deal-hungry shoppers are shirking price hikes — at least at Abercrombie & Fitch Co.

The teen retailer was unable to get consumers to buy enough fashions at higher prices to sufficiently offset rising commodity costs and as a result missed Wall Street’s third-quarter earnings projections by a hefty 14 cents a share, causing its stock to plummet 13.6 percent to $48.10.

“We are not immune to the macroeconomic environment,” said Michael Jeffries, chairman and chief executive officer on a conference call with analysts on Wednesday. “So we demand high profitability levels from our new stores based on conservative assumptions and this underpins our belief in the long-term sustainability of our business.”

Normally propped up by its robust international results, Abercrombie also felt the sting of the slowing European economy as consumers there pulled back.

A&F’s international flagships turned in negative comparable-store sales, but “significant” average unit retail increases “protected the gross margin rates in these stores.”

“If anyone is inclined to believe that a softening of our business in Europe this quarter in the face of severe macroeconomic headwinds is a major issue for our model, frankly, I think they’re missing the forest through the trees,” said a defensive Jeffries.

But this marked the first time that comps at the firm’s European flagships turned negative, according to Stifel Nicolaus analyst Richard Jaffe, who said trends “reversed” in the quarter, with results accelerating domestically, and slowing internationally.

“We believe domestic results are being driven by promotions while the nonpromotional international business is being pressured by the difficult and uncertain economic environment,” Jaffe said. “Within the U.S….The company chose to drive sales and store productivity at the cost of margin.”

Net income rose 1.7 percent to $50.9 million, or 57 cents a diluted share, in the period ended Oct. 30. This compared with year-ago income of $50 million, or 56 cents a share. Analysts were looking for third-quarter earnings per share of 71 cents.

Quarterly sales increased 21.5 percent to $1.08 billion, from sales of $885.8 million in the prior year. Even though international growth decelerated, it still jumped 56 percent to $255.7 million, as domestic sales expanded 14 percent to $820.2 million. Total e-commerce sales were up 41 percent to $132.4 million.

Pressured by lower-priced rivals, the firm was forced to keep prices competitive, cutting into gross margins, which declined to 60.1 percent of sales versus year-ago margins of 63.7 percent.

Comps, which rose 4 percent overall, increased 8 percent at Hollister & Co., 4 percent at A&F and 6 percent at abercrombie kids. Despite global economic headwinds, the New Albany, Ohio-based retailer echoed plans to open 40 international mall-based Hollister stores this year, of which 25 had opened as of Oct. 29. The company will also cut the ribbon on five international A&F flagships this year, in addition to flagships in Amsterdam, Munich, Hamburg and Hong Kong in 2012.

The retailer reiterated plans to shutter 55 to 60 stores in the U.S. this year.