Abercrombie & Fitch Co. is sending its Australian-themed Gilly Hicks intimates division down under.

This story first appeared in the November 6, 2013 issue of WWD. Subscribe Today.

As it battles declining revenues and margins, the company said late Tuesday it will close the 28-unit operation and instead incorporate the Gilly Hicks brand into its Hollister stores, which number nearly 600, and online. Gilly Hicks opened its first five stores at the start of 2008.

All stores are expected to be closed by the end of the first quarter of 2014. The closure is the second of an A&F initiative in four years. The Ruehl brand, begun in 2004, was closed in late 2009 after reaching 29 units.

As it prepared for a series of analyst presentations on Wednesday, the company reported total sales for the third quarter ended Nov. 2 declined 11.7 percent, to $1.03 billion from $1.17 billion, as comparable sales, including direct-to-consumer revenues, fell 14 percent, with U.S. comps down 14 percent and international comps off 15 percent. DTC revenues rose 11 percent. The comp trend represents deterioration from a weak second quarter, during which comps declined 10 percent.

Michael Jeffries, chairman and chief executive officer of A&F, said the Gilly Hicks decision follows a “successful pilot of selling Gilly Hicks branded intimates in Hollister stores. As a result, we have made the determination to close our stand-alone Gilly Hicks stores. We believe it is critical to focus our efforts and resources where we have the greatest opportunities to drive profitable growth for our brands.”

Described by A&F as “the cheeky cousin of Abercrombie & Fitch” and “an all-American brand with a Sydney sensibility,” Gilly Hicks, like many secondary brands developed by specialty store retailers over the years, had struggled for meaningful momentum. Sales last year hit $109.6 million, up 50.2 percent from the prior-year level of $73 million, but reached only 2.4 percent of total corporate revenues of $4.51 billion.

In cautionary language in its most recent annual report, the firm said, “The failure of Gilly Hicks to be launched and expanded successfully, and to achieve profitability, could have a material adverse effect on our financial condition and results of operations. The costs of exiting a brand are significant. In addition, the ongoing development of new concepts may place a strain on available resources.”

That strain intensified as business conditions eroded throughout the third quarter, and the exit costs will affect the company beyond the end of the current year.

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The company estimated that it will incur pretax charges of about $90 million in connection with the decision, including about $40 million in noncash impairment costs and $50 million in charges related to lease terminations, severance and other charges. The bulk of the charges will come in the final two quarters of the current year and the first quarter of 2014.

Jeffries noted that third-quarter results “reflect continued top-line challenges, with overall spending among younger consumers remaining weak. Until we have seen a clear trend improvement, we are continuing to take a cautious approach into the fourth quarter and are working to end the year with appropriate levels of fall carryover inventory.”

Adjusted earnings for the third quarter are expected to land at the high end of its earlier non-GAAP guidance of between 40 cents and 45 cents a diluted share. That estimate excludes charges of between $90 million and $100 million related to the Gilly Hicks closure, impairment among its other stores and costs related to profit enhancement efforts.

Significant relief isn’t expected in the fourth quarter, for which the firm expects a low-double-digit decline in comparable sales and “significant gross margin rate erosion…as the company clears through excess inventory.”

The pretax loss for Gilly Hicks, excluding charges, is anticipated to be $30 million for the current year.

The company’s shares were up 10 cents, or 0.3 percent, to $38.31 during regular trading on the New York Stock Exchange Tuesday but declined $2.81, or 7.3 percent, to $35.50 following disclosure of preliminary quarterly results as the equity markets closed.

At the end of the second quarter, A&F operated 1,057 stores, including 594 under the Hollister name, 285 Abercrombie & Fitch units and 150 abercrombie kids’ wear stores.

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