By  on August 1, 2012

Abercrombie & Fitch Co., faced with drooping sales and a weak European economy, is putting the brakes on expansion and cutting its forecasts.

A&F said comparable-store sales for the second quarter ended July 28 fell 10 percent overall, with U.S. stores declining 5 percent and international stores plummeting 26 percent. Within the quarter, sales were weakest in June.

Based on the weak second-quarter sales trend and an assumption that same-store sales in the second half will be down 10 percent, the retailer now expects full-year diluted earnings per share of about $2.50 to $2.75, considerably lower than the $3.50 to $3.75 projected earlier this year.

The reduced forecasts caused the company’s shares to drop 16 percent in after-hours trading.

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For the second quarter, earnings are seen at 15 cents to 18 cents. The company continues to expect substantial recovery of the gross margin rate erosion seen in 2011 on a 2012 full year basis. In addition to lower sales, the reduction in projected earnings reflects a stronger U.S. dollar and higher taxes, primarily due to a reduced benefit from international operations taxed at a lower rate.

A&F will slow its expansion by opening 30 Hollister stores, instead of the 40 previously expected, and putting commitments to new flagships on hold, except for one in Shanghai.

A&F also said that the run rate for future chain stores abroad is being reduced to focus on under-penetrated markets where cannibalization effects should be minimal.

“Macroeconomic conditions remained very challenging during the quarter, particularly in Europe but also increasingly in the U.S.,” said Mike Jeffries, chairman and chief executive. “In that context, we will continue to be highly disciplined in our new store approval process and only commit to stores where we are confident they are likely to generate a stronger return than alternative uses of cash. We believe this has clearly been the case for the international investments we have made to date, as our international stores remain much more productive and much more profitable than our U.S. fleet. However, given recent trends, particularly in Europe, we believe it is appropriate to revise our plans in response.”

Net sales for the second quarter ended July 30 increased 4 percent to $951.4 million, compared to net sales of $916.8 million in last year’s quarter. Total U.S. sales, including direct-to-consumer sales, decreased 5 percent to $648 million. Total international sales, including direct-to-consumer sales, increased 31 percent to $303.4 million. Total company direct-to-consumer sales, including shipping and handling, increased 25 percent to $127.7 million.

The company expects gross margins for the second quarter to erode about 100 basis points versus last year. Additionally, the company expects inventory at cost to be up approximately 20 percent at the end of the second quarter.

Further details on sales, profits, capital expenditures and expansion plans will be given when the company reports second-quarter earnings on Aug. 15. At that time, the company will also discuss its share repurchase program, which could be expanded.

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