Shares of Abercrombie & Fitch Co. climbed more than 10 percent in Friday trading after the teen retailer led off the fourth-quarter retail earnings season with a smaller-than-expected decline in profits and sharp cuts in capital expenditures.
The New Albany, Ohio-based specialty retailer will lower capex to between $165 million and $175 this year, between $120 million and $125 million for new or refurbished stores and the remainder for technology, distribution and headquarters projects, less than half the $370 million spent in the just-ended fiscal year.
While its plans for U.S. expansion include only 10 new stores, versus 90 in 2008, it may open that many in Europe for its Hollister brand alone. Also in the works are Abercrombie & Fitch and Abercrombie flagships in Milan and an A&F flagship in Tokyo.
"People were surprised pleasantly that capex is being cut by 60 percent and that inventories were in a better position than we thought," said J.P. Morgan retail analyst Brian Tunick, who said reined-in expenses and a decision to suspend guidance might have also contributed to the stock's gains.
For the quarter ended Jan. 31, the retailer posted a 68.4 percent drop in net income to $68.4 million, or 78 cents a diluted share, from $216.8 million, or $2.40 a share, a year ago. Excluding a 21-cent impairment charge and an 11-cent tax charge related to the new employment contract of Mike Jeffries, chairman and chief executive officer, EPS was $1.10, 10 cents above analysts' consensus estimates as reported by Yahoo Finance.
Sales in the three months fell 18.8 percent to below $1 billion — $998 million — from $1.23 billion in the comparable 2007 period and were down 25 percent on a same-store basis with all divisions — A&F, Abercrombie, Hollister and Ruehl — down at least 23 percent.
For the year, Abercrombie recorded a 42.8 percent slide in profit to $272.3 million, or $3.05 a share, from $475.7 million, or $5.20 a share, a year ago. Sales in 2008 fell 5.6 percent to $3.54 billion from $3.75 billion in fiscal 2007.
On a conference call with investors, Jeffries said he believed the quarter would "go down in history as one of the biggest retail nightmares." He said the volatile economy led to malls dominated by promotions and consumers who were reluctant to spend, especially on premium brands.
"In this context, particularly given our position as an aspirational brand, we are satisfied with our results for the quarter," Jeffries said. He added the company used markdowns to clear seasonal inventory, slowed U.S. expansion plans and cut back on expenses to better its cash position.
Jeffries spoke repeatedly of protecting the company's brands in the weak retail environment. He said the firm will lower initial price points at its Abercrombie and Hollister stores in 2009, but that Abercrombie & Fitch prices will largely hold. Though he conceded markdowns are a part of the business, he said the company will not be promotional.
"Because, very candidly, most of the mall looks as if it's in catastrophe mode," Jeffries said. "We do not and will not. And that's an important statement regardless of what we say here today."
Retail analyst Chandi Neubauer of Majestic Research said that though Jeffries might not characterize it as promotional because it wasn't advertised, the sale environment at Abercrombie & Fitch stores was aggressive and that the company benefited from it.
"The sales have really been driving traffic. Managers said they can't move anything at full price," Neubauer said.
Despite the declines in profit and sales, the company's cash position and long-term strategy attracted investors to Abercrombie stock Friday, analysts said, sending it up $2.08, or 10.1 percent, to close at $22.78, two-thirds higher than its 52-week low of $13.66, reached on Nov. 21, but only 27.8 percent of its 52-week high of $82.06, hit last Feb. 27.
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