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Abercrombie & Fitch Set to Close More U.S. Doors

Promotions hurt specialty retailer in fourth quarter, but outlook warms investors.

Abercrombie & Fitch Co. plans to keep trimming its “B-mall” fat in America while toning its international assets — and Wall Street likes what it sees, even though the company turned in a weak fourth-quarter performance.

The New Albany, Ohio-based retailer, which opened 47 international stores and shuttered 71 U.S. doors last year, plans to close roughly 180 additional U.S. stores by 2015.

That means the company, which already shuttered 135 stores over the past two years, is on track to cut its U.S. store count by 315, or 29.1 percent, over the five-year period leading up to 2015. The firm currently has 946 domestic stores.

For Abercrombie, it’s more of a real estate churn than outright decline, with stores in weaker U.S. malls getting cut and replaced with higher-margin stores overseas. The firm’s door count has been declining only slightly, dropping to 1,045 stores at the end of the fiscal year on Jan. 28 from 1,096 stores two years earlier.

“A smaller [U.S.] base in better malls play to the quality level of the A&F business around the world,” said Mike Jeffries, chief executive officer and chairman, on a conference call with analysts.

Although Abercrombie’s net profits fell sharply in the most recent quarter thanks to aggressive price promotions, results were in line with its warning earlier this month. Net income slumped 78.9 percent to $20 million on a 15.6 percent rise in sales to $1.33 billion. Excluding charges to write down the value of assets, close stores and account for other special items, adjusted earnings tallied $1.12 a share — in line with what Wall Street expected. U.S. sales inched up 4 percent during the quarter, while international sales shot up 62 percent and direct-to-consumer revenues gained 41 percent. The firm projected 2012 earnings per share of $3.50 to $3.75 — opening up some upside to the $3.47 analysts had penciled in.

Heartened by the outlook and the emphasis on top U.S. locations and international expansion, investors pushed the stock up 8.3 percent to $48.30.

And even as Europe teeters on the edge of recession, Jeffries expressed confidence, telling investors, “The overall economics of our business in Europe remain very strong. Our top line in Europe grew 85 percent for the quarter. Hollister Europe, which now represents approximately two-thirds of our store business in Europe, continued to [see comparable-store sales growth] despite a very difficult environment.”

By taking its brand cachet and moody flagships overseas, Abercrombie has answered, at least for itself, one of the most vexing questions for U.S. retailers: Where to find growth?

A host of other retailers — including Coldwater Creek Inc., Christopher & Banks Corp., The Talbots Inc. and Pacific Sunwear of California Inc. — have also shuttered U.S. doors, but have less certain prospects in markets outside the U.S.

“Not every brand can go international,” said Christine Chen, analyst at Needham & Co. “Abercrombie stands for something. What they’re doing from a store environment is something that’s unique for the international markets. There’s nothing like them over there. The areas that they’re going into — Europe and Asia — those regions have a big club culture and their stores are quasi-clubs. For the young customer, it can be viewed as a cool place to hang out.”

In the U.S., Chen noted that some of the malls that used to be considered “B-plus” are now “B-minus,” given the changes in the U.S. economy over the past few years.

Erika Maschmeyer, analyst at Robert W. Baird & Co. Inc., said closing stores in the U.S. was a “smart move.”

“They have 250 stores that are operating at levels that are closer to their high-margin international flagships,” she said. “It’s good for the brand, it’s good for margins to get rid of the underperformers.”

Competition from the Internet is also forcing stores to go dark.

“The bigger trend isn’t so much going overseas, but it’s realizing that with e-commerce you don’t have to have as large a real estate footprint,” Maschmeyer said.