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Analysts Call for Sale of ANF Chain (Update)

Updated from 9:43 a.m. EDT.

It's about time Abercrombie & Fitch (ANF - Get Report) starts to rethink its Ruehl concept. And that is apparently now, as the company announced on Friday a "strategic review" of the Ruehl chain.

The teen apparel retailer swung to a loss in the first-quarter, bogged down by lackluster sales at Ruehl and store and distribution expenses. The company also blamed higher occupancy expenses for missing analysts' estimates.

This is not the first time the Ruehl business, which is aimed at an older demographic then the core chain, has given Abercrombie & Fitch some problems. In the fourth quarter the company saw a slump in profit, mostly associated with non-cash write-down on assets associated with its Ruehl stores. The chain also saw a 25% drop in same-store sales during that quarter which resulted in a $10 million operating loss last year.

"While we like this store, it never really had the same commercial appeal of the company's other concepts, and has been a money losing venture from the get go," says analyst Jennifer Black of the firm bearing her name. "It is our expectation and hope that the review will result in the shuttering of the entire Ruehl concept. We believe that such an announcement would be well received by Wall Street."

Richard Jaffe, analyst at Stifel Nicolaus, also called for the closure of the chain, which he says has been a financial drag and distraction to Abercrombie's management team.

Similar contemporary spin-offs, such at American Eagle Outfitters' Martin + Osa, have also had a hard time getting off the ground.

During the quarter, Abercrombie & Fitch recorded a loss of $26.8 million, or 31 cents a share, drastically missing the mark of analysts, who expected a loss of 14 cents. This compares with a profit of $62.1 million, or 69 cents, last year.

Abercrombie & Fitch said the loss could become even bigger depending on the outcome of the strategic review of Ruehl. The company said it expects to take a charge of up to about $55 million before taxes, which will be added to the first-quarter report it files with the Securities and Exchange Commission.

Sales tumbled 24% to $612.1 million, while same-store sales tanked 30%. By division, comparable sales at Abercrombie & Fitch stores declined 26% and sank 34% at Ruehl. The company also operates childrens-brand abercrombie as well as Hollister, which saw a 33% and 32% decline in comps, respectively.

During a conference call, Chairman and Chief Executive Mike Jeffries said sales also suffered due to some fashion misses. "Clearly we missed dresses and clearly we weren't as aggressive with print and pattern as we should have been," he said. "We were wrong. I was wrong, and we're correcting as we go forward."

Dresses will be delivered to the company's stores "aggressively" during the current quarter, he said.

Going forward, Roxanne Meyer, analyst at UBS, said in a note on Friday that she will be closely watching the company's domestic business. "We'll be looking for stabilization and better acceptance of new fashion and higher price points," she wrote.

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