Abercrombie’s Margin Talk Cheers Investors

Abercrombie’s Margin Talk Cheers Investors
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Shares of Abercrombie & Fitch Co. saw their biggest percentage gain in almost two years Wednesday after the teen-apparel retailer said reduced cost pressure will deliver “significant” margin recovery in the second half of the year.

Abercrombie stock rose 12% to $49.87, for its biggest gain since March 2010.

The company forecast profit for fiscal 2013 of $3.50 to $3.75 a share. Analysts surveyed by FactSet were looking for profit for the year of $3.55 a share.

That’s welcome news to investors after the New Albany, Ohio-based retailer ANF +11.37%  reported a 79% slide in its fourth-quarter profit early Wednesday. The main culprit: Gross margin narrowed by 7.5 percentage points to 56.1%, hurt by higher costs and increased discounts.

The company’s stock has slid 47% from a 52-week high of $78.25 to a low of $40.25 on Feb. 3 after it warned in November that it wasn’t able to raise prices to offset higher costs in an increasingly competitive environment.

Abercrombie cut prices and became more promotional during the holiday season to lure still budge-conscious shoppers in an uncertain economy, analysts said.

“The difficult macroeconomic environment we saw in the third quarter continued into the fourth quarter, and was exacerbated by all-time high cotton costs, unusually warm weather, both in the U.S. and in Europe, and a highly aggressive promotional environment,” said Chief Executive Mike Jeffries on a conference call with analysts, adding that the company wasn’t able to keep its prices higher to offset rising unit costs. “These effects put pressure on our selling margin beyond what we anticipated.”

Overall, fiscal fourth-quarter profit fell to $19.6 million, or 22 cents a share, from $92.6 million or $1.03 a share a year earlier. Sales in the quarter ended Jan. 28 rose 16% to $1.33 billion. Comparable-store sales were flat.

Excluding asset impairment, store-closing and other charges, the company said it would have earned $1.12 a share in the latest period. Analysts surveyed by FactSet estimated profit of $1.13 a share.

While he remained cautious about sales and the promotional environment in the United States, Jeffries said there were some positive signs. For one, the biggest spike in cotton costs the industry has seen in at least a decade is reversing course, and is expected to lower costs beginning in the second quarter and significantly in the second half of the year, he commented.

Cotton prices have declined 37% from their spring 2011 high, according to Credit Suisse analyst Christian Buss.

Inflation in cotton costs last year has hurt not only Abercrombie and its teen rivals American Eagle Outfitters Inc. AEO +5.74%  and Aeropostale Inc. ARO +0.68% , but also other companies from Nike Inc. NKE +0.74%  to Ralph Lauren Corp. RL -0.11%

In the sector Wednesday, American Eagle was up 4.2%. Aeropostale gained 1%. The S&P Retail Index dipped 0.2% in contrast.

Jeffries also said the company’s business in Europe, a key area of its international expansion, is still going strong despite the region’s debt crisis that has hurt consumer sentiment. Sales in Europe rose 85% and its Hollister chain, which makes up about two-thirds of the company’s store business in Europe, also continued to see positive same-store sales.

Abercrombie’s direct business also was solid both in the United States and overseas, according to the chief executive.

In China, where Abercrombie plans to open its third mall-based store in March, Jeffries said the company has seen a steady increase in momentum. “Our overall business with Chinese customers is very modest today, including our U.S. and European tourist stores, and we see growing awareness and familiarity with our brands in China as a major opportunity.”

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