Abercrombie & Fitch Co.’s growing international business paid dividends in the second quarter, but the company said it would close 10 to 15 more U.S. stores than planned and warned gross margins were deteriorating.
Despite a 64.4 percent gain in net income for the quarter, shares of Abercrombie fell 7.8 percent to $65.47 in midday trading as investors focused on the second half.
In addition to losing traction on Wall Street, the company lost at least one high-profile and loyal customer when it offered on Tuesday to pay “Jersey Shore” star Michael “The Situation” Sorrentino to stop wearing its products.
Chief executive officer and chairman Mike Jeffries told analysts on a conference call that the company was “having fun” as it tried to control The Situation and credited stronger quarterly results to an improvement in merchandise, as well as varied pricing and promotional strategies.
“Even in an environment where price is increasingly important, you have to be a desirable brand that clearly stands for something in the eye of the consumer,” Jeffries told analysts. “Costing issues will certainly impact us more significantly in the back half of the year, and the consumer response to price increases remains unclear.”
The ceo said the turbulent global macroeconomic environment and possible exchange rate volatility could impact its growing European business.
For the quarter ended July 30, the New Albany, Ohio-based firm’s profits jumped to $32 million, or 35 cents a diluted share, compared with year-ago income of $19.5 million, or 22 cents a share. Profits came in 6 cents ahead of analyst estimates.
Net sales increased 22.9 percent to $916.8 million from $745.8 million a year earlier. International sales expanded 74 percent to $231.9 million, while U.S. sales rose 12 percent to $684.9 million.
Comparable-store sales rose 9 percent, with gains of 5 percent at the firm’s namesake chain, 7 percent at its kids’ division and 12 percent at Hollister & Co.
The retailer acknowledged it has had some early difficulties in passing on price increases. Its second-quarter gross margin slid to 63.6 percent of sales compared with a year-ago margin of 65.1 percent.
Jonathan Ramsden, chief financial officer, principal accounting officer and executive vice president, told analysts that the company anticipates continued margin deterioration in the back half of the year, as “visibility on the magnitude of this erosion is less clear than in the first half of the year due to the uncertainties.”
Although it did not provide full-year guidance, the retailer said domestically, it would shutter about 60 to 65 stores and open two in 2011. In May, Abercrombie said it would close about 50 domestic stores.
Internationally, it still expects to open five A&F locations during the year, including a Paris flagship in May.
The company also plans to open up to 40 international mall-based Hollister locations, of which six opened in the first half of 2011.