Lower prices whetted consumers’ appetite to shop, giving Abercrombie & Fitch Co. a 29 percent bump in third-quarter profits, but the teen retailer warned that gross margins in the fourth quarter would be down slightly due to more markdowns.

This story first appeared in the November 17, 2010 issue of WWD. Subscribe Today.

 

For the period ended Oct. 30, the New Albany, Ohio-based chain said net income grew to $50 million, or 56 cents a diluted share, compared with income of $38.8 million, or 44 cents a share, in the year-ago quarter.

 

Net sales improved 17.5 percent to $885.8 million from $753.7 million in 2009, aided by an 87 percent leap in international sales to $164.1 million. Wall Street anticipated EPS of 51 cents on sales of $881.3 million, according to Yahoo Finance.

 

Comparable-store sales rose 7 percent, led by an 8 percent increase at the company’s namesake chain. Comps at Hollister Co. and Abercrombie Kids expanded 7 percent and 2 percent, respectively.

 

A decline in average unit retail pulled gross margin down to 63.7 percent of sales versus year-ago margin of 64.1 percent. The company said it expects a “similar level of erosion in the fourth quarter.”

 

On the company conference call, chairman and chief executive officer Mike Jeffries said, “Cost pressures from raw materials and labor costs have only increased as we have gone through the year, and transportation costs remain at very high levels.…We expect to make progress on gross margin in the first half of 2011 overall. However, for receipts later in the season, costs are escalating significantly and visibility beyond that is limited.”

 

Global expansion remained a bright spot for the retailer, and because the firm does not offer promotions in its stores abroad, other than in Canada, this will likely cushion margin erosion, the company said.

 

RBC Capital Markets analyst Howard Tubin noted that the retailer’s international expansion outside North America, which is expected to total 43 stores in 2010, would also offset some upcoming “costing pressures.” But, he added that inventories “remain high, up 47 percent,” and “an inventory build of this magnitude poses risk to future gross margin.”

 

The teen retailer said it swung to a $57.7 million profit, or 64 cents a diluted share, in the nine-month period, compared with a net loss of $47.2 million, or 54 cents a share, a year earlier. Sales jumped 16.4 percent to $2.32 billion from $2.0 billion in 2009.

 

Shares rose 35 cents, or 0.8 percent, to $45.68 in New York Stock Exchange trading Tuesday.

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