By and  on November 26, 2007

After posting robust third-quarter results, Gap Inc. and Abercrombie & Fitch Co. face a tough holiday shopping season.

Abercrombie said on a conference call last week that it is well-positioned for holiday, and is driving on with its expansion, especially overseas.

For Gap Inc., a cautious outlook for the fourth quarter reminded Wall Street that the holiday shopping season could be particularly challenging for the specialty retail channel, which is already locked into a competitive market share battle.

In an example of the cautious climate, Hot Topic Inc. reported in-line earnings per share last week of 15 cents, but Citigroup analyst Kimberly Greenberger slapped the company's stock with a downgrade to "hold," saying it would be prudent to wait for the retailer to deliver improved sales.

At Gap, net earnings for the quarter ended Nov. 3 swelled 26 percent to $238 million, or 30 cents a share, from $189 million, or 23 cents, in the previous year on sales of $3.9 billion. Same-store sales fell 5 percent during the quarter. Gap's online sales rose 36 percent to $247 million from $182 million last year.

The company revised its 2007 EPS guidance to a range 99 cents to $1.05 per share from the previous guidance of a range of 90 to 95 cents.

Sabrina Simmons, senior vice president of corporate finance, said on a conference call to analysts that the outlook remains cautious for the rest of 2007. The rationale, Simmons explained, is that the fourth quarter is "our most important selling season....Given that we are still in a turnaround, it is difficult to predict how product will be accepted. And the macroeconomic environment warrants caution."

Glenn Murphy, chairman and chief executive officer of Gap, said the company made progress in the third quarter in regard to inventory and reducing expenses.

On the conference call, Murphy said, "we also feel this is going to be a tough economic environment in this upcoming holiday selling season. We feel good that we've been disciplined on the inventory front....The consumer will ultimately be the judge, but we feel we are well-positioned for the holiday season and we're also very clearly aware this is going to be a tougher environment than we faced last year."Murphy added on the call that the Gap and Banana Republic brands have "made positive strides in their product offering for the holiday season." He said the Gap brand is all about color and the theme this year includes offering "crazy stripes."

For Banana Republic, the theme is '"sharing the gift of color' and [the management team is] really focused on bringing better gift ideas that are brand appropriate to what Banana Republic stands for in the marketplace," he said.

At Abercrombie & Fitch, the specialty retailer reported earnings increased 15 percent to $117.6 million, or $1.29 a diluted share, from $102 million, or $1.11 a diluted share, during the same period last year on sales that increased 5.8 percent to $973.9 million from $863.4 million. Comparable-store sales for the quarter increased 1 percent.

Abercrombie & Fitch stores increased sales 10 percent for the quarter, to $419.3 million. Comparable-store sales at namesake stores increased 3 percent. Net sales for the Hollister stores increased 14 percent, to $414.5 million and same-store sales decreased 1 percent. Ruehl had an increase of 55 percent in sales to $12.6 million. Comparable-store sales were down 7 percent. Sales for the company's Abercrombie kids brand were up 17 percent to $127.6 million. Same-store sales there were up 3 percent.

The company reaffirmed its outlook and said it expects earnings for the second half of 2007 to be between $3.63 and $3.67 a diluted share. The lower end of guidance would reflect flat same-store sales for the fourth quarter, the company said.

Michael W. Kramer, executive vice president and chief financial officer at Abercrombie, said on a conference call with analysts that the company is "currently assessing opportunities for Abercrombie & Fitch in Milan, Copenhagen, parts of China; and for Hollister, a location in London. We hope to announce another major Abercrombie & Fitch European location imminently."

Kramer said in addition to pursuing growth initiatives, "we are working hard to improve efficiencies in both our sourcing and supply chain, so that we can create more operational leverage."

Mike Nuzzo, vice president of finance, said on the call that as the company enters the holiday shopping season, it is well-positioned in the market. "Our focus remains long-term, and most importantly we are making strategic investments in stores, merchandise development and administrative support infrastructure to match our five and even 10-year growth plan."Elsewhere in the specialty channel last week, Charming Shoppes posted a third quarter loss and reduced its fiscal 2008 outlook. But the Buckle Inc. said net income soared 25.7 percent to $22.2 million as sales jumped 17.1 percent to $167.6 million.

On deck this week to report results from the specialty channel are Citi Trends, American Eagle Outfitters Inc., Dress Barn and Talbots Inc., among others.

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