By  on May 19, 2008

Teen retailer Abercrombie & Fitch Co. said Friday that first-quarter earnings increased 3.4 percent and predicted that eventually half its business will be international.

For the three months ended May 3, earnings reached $62.1 million, or 69 cents a diluted share, up from $60.1 million, or 65 cents, in the year-ago period. Analysts were expecting earnings of 66 cents a share, but a lower tax rate and stronger gross margins helped to offset weaker same-store sales. Sales for the quarter grew 7.8 percent to $800.2 million from $742.4 million, and total same-store sales fell 3 percent.

By division, comps increased 3 percent at Abercrombie & Fitch, fell 7 percent at the abercrombie kids concept, decreased 8 percent at Hollister, and were down 17 percent at Ruehl.

The gross profit rate was 66.8 percent, a 120 basis point increase driven by higher initial markups and a decrease in lost or stolen merchandise.

The quarterly growth came despite the weak economic environment and slowdown in the retailer's women's and girls' fashion business, particularly in fashion knit tops, the company's largest selling category, chief financial officer Mike Kramer said during a conference call with Wall Street analysts.

"We are benefiting from international tourists traveling to the U.S. to take advantage of a weak U.S. dollar," Kramer said on the call. "We were able to realize this benefit because of our global brand recognition. This is additional proof that there is global demand for our brand, and it gives us further confidence that we can be successful with our international expansion initiatives."

The strength of the international division has led management to forecast that in seven to 10 years, half of Abercrombie's business will be from abroad. It now represents 13 percent of revenues.

The company reaffirmed earnings guidance of $1.61 to $1.65 a diluted share for the first half. The low end of the guidance reflects a 2 percent decrease in same-store sales for the second quarter, management said.

Although analysts were impressed with the success of the existing concepts, new locations and launch of innovative initiatives, they remain doubtful in the short term.

"In the near term, we believe the women's assortment will continue to struggle with a lack of a strong fashion trend and the macro environment will likely remain challenging through much of 2008," said Richard Jaffe, retail analyst at Stifel Nicolaus.

Abercrombie trimmed its 2008 expansion plans to 10 percent square-footage growth from its previous estimate of 11 percent. The company expects to open its second European Abercrombie & Fitch flagship and first Hollister flagship in New York in 2009, and plans to launch its first abercrombie flagship on New York's Fifth Avenue in 2010.

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