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Abercrombie & Fitch Hopes Woes Are Growing Pains

The one-time poster child for international expansion now finds itself repositioning both at home and abroad.

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Almost everything has gone against Abercrombie & Fitch Co. — a one-time poster child for international expansion that now finds itself repositioning both at home and abroad.

The company is closing stores in the U.S., particularly in its abercrombie kids business. It’s scaled back on international expansion, where key flagships have been cannibalized by newer stores. And its fashions have missed the mark. Abercrombie warned earlier this month that it was going to take a hit and on Wednesday said second-quarter earnings fell 52 percent with a 26 percent comparable-store sales drop in its international stores. U.S. stores posted their first comp drop since 2009.

Mike Jeffries, architect of the company and its chairman and chief executive officer, was somewhat introspective on a conference call with analysts: “One question we continue to ask ourselves as a team, and I know many of you have the same question, is, ‘How much of the trend is self-inflicted?’ The answer is not wholly clear.”

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He noted, though, that there have both been factors beyond his control — such as Europe’s economic woes — and areas where the company can do better.

His program to get Abercrombie back on track includes:

• Conservative merchandise plans with a shorter product development cycle, more U.S. and Central American sourcing and a revved up effort to chase hot trends.

• New merchandise, planning and allocation systems to keep inventories in check.

• Building a team to better understand customer dynamics in key international markets.

• Continue to close U.S. stores as leases expire.

Investors, who were prepared for the quarter’s retrenchment, apparently liked what Jeffries had to say and pushed the stock up 9 percent to $35.23. The stock, however, is still far from its 52-week high of $77.49.

“He sounded very humble,” Paul Lejuez, an analyst at Nomura, said of Jeffries. “He was really reflecting on mistakes that were made and I think making rational decisions to put him in the best position to correct them — not to say it’s going to be easy. He’s doing things to prevent the problems from getting worse; we have yet to see anything that actually fixes the problem.”

Lejuez said the brand seems to be “losing its cachet” and that the company’s results make it a little less attractive a stock than it was.

Jeffries tried to make the case that, even though operations have sagged, that Abercrombie is still good investment.

He said the company’s first international Abercrombie flagship, in London, was “significantly affected” when the firm opened other stores in Europe. But even with this cannibalization, Jeffries said the store’s sales totaled $64 million over the past 12 months with earnings before interest, taxes, depreciation and amortization of about $33 million. Factoring in initial costs of nearly $30 million to get the flagship up and running, it has shown an annual return on investment of about 80 percent. Additionally, Jeffries said the company’s Hong Kong flagship has logged more than $1 million in sales since it opened Saturday.

But Wall Street was not entirely sold.

“I wish management would acknowledge to a greater degree that more of this has been self inflicted,” said Erika Maschmeyer, an analyst at Robert W. Baird & Co. Inc. The analyst said the focus on fixing fashion misses with shorter lead times shows that Jeffries “hasn’t fully acknowledged the extent of the blame that he and his team should have.”

Maschmeyer also said the example of the London flagship suits the company’s conclusion that international expansion should be given higher priority than share buybacks.

Abercrombie expanded its share buyback program, but gave no assurances that it would indeed buy back stock.

But Betty Chen, an analyst at Wedbush Securities Inc., expects the company will buy back stock to support earnings until the tweaks Jeffries is making can take hold.

People walked away [from the conference call] feeling like he will eventually get the product right and in the meantime they’re doing all the right things to shore up earnings and control the business,” Chen said.

Abercrombie’s second-quarter earnings fell to $15.5 million, or 19 cents a share, from $32 million, or 35 cents, a year earlier. Sales for the three months ended July 28 rose 3.8 percent to $951.4 million from $916.8 million as comps fell 10 percent.

The company previously cut its annual profit outlook to a range of $2.50 to $2.75 a share, down from the $3.50 to $3.75 previously projected.

Abercrombie is scaling back its Hollister Co. openings abroad to 30 from the roughly 40 previously planned. And aside from a planned outpost in Shanghai, the company is holding off on commitments for new flagships.

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