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Updated from Feb. 17

Abercrombie & Fitch


has been struggling with sales for years. The company's answer? Raise prices.

That was the bombshell dropped by company executives on a conference call Tuesday afternoon held to discuss the company's fourth-quarter report. Although Wall Street participants were expecting the company to announce some strategy changes, few expected the company to go this route.

"This one baffles me," said Rob Wilson, an analyst who covers the company for Tiburon Research Group. "The conventional wisdom was that they were going to go in the reverse direction." (Wilson doesn't hold Abercrombie shares and Tiburon doesn't do investment banking.)

Analysts may have been skeptical of the new plan, but investors bought up the company's shares early Wednesday. Abercrombie's stock was recently up $1.75, or 6.2%, to $29.95.

Abercrombie plans to raise prices on selected goods at its core Abercrombie & Fitch stores, said CEO Mike Jeffries. The price increases are part of a larger effort that also involves a new marketing plan and renewed focus on the company's merchandise, Jeffries said.

Although analysts questioned the price increases, Jeffries said it was the right strategy. The company had tried to use promotions to drive sales, but without success.

"We must be perceived as one of the coolest brands," Jeffries said, adding, "We can't be aspirational and promotional at the same time."

The higher prices should raise the average price of items sold at Abercrombie, increase sales and "position the brand at the right quality level," he said. Jeffries added that he didn't expect the sales gains to happen overnight.

Analysts were a bit more skeptical about whether the plan would work at all.

"I just don't understand how a company that can't put up a positive

comparable-store sales gain in however many quarters can think that if they charge higher prices they're going to get more people in their stores," said Christine Andranian Sherry, a buy-side analyst who covers Abercrombie for Bricoleur Capital, which doesn't hold Abercrombie shares.

Although the company beat earnings expectations, Abercrombie's sales problems put a damper on its fourth-quarter report.

After the close Tuesday, Abercrombie reported fourth-quarter earnings of $94.28 million, or 96 cents a share, compared with $92.82 million, or 93 cents a share, in the year-ago period. That's the 46th straight quarter the clothing retailer has posted a year-over-year earnings increase.

But the company continued to post slowing sales, as same-store sales fell 11% in the quarter vs. year-ago levels. The company has posted same-store sales declines in 30 of the last 33 months. (Same-store sales compare like results at outlets open more than a year.)

Overall, the company's revenue increased just 4.8% to $560.39 million vs. the fourth quarter a year earlier.

Analysts surveyed by Thomson First Call were expecting the company to earn 95 cents a share on $562.49 million in sales.

In recent months, the clothing chain gave investors some doubt about its ability to keep its earnings streak going, forecasting earnings that would be, at best, on par with last year's. After a rare month of positive same-store sales, the company

upped its earnings guidance earlier this month to just 93 cents a share. Previously, Abercrombie had projected earnings of 90 cents a share.

After Abercrombie raised its guidance, analysts upped their own expectations.

But the company's streak remains in doubt. Abercrombie said it was "comfortable" with analysts' forecasts of 26 cents a share in earnings in the second quarter. The company earned an equivalent amount in the second quarter last year.

The company's revenue problems affected each of its three chains during the fourth quarter. Same-store sales fell 14% at the company's Abercrombie & Fitch chain and 7% at its Abercrombie kids stores. Meanwhile, Hollister, Abercrombie's newest chain, which targets young teens, posted flat same-store sales for the quarter.

"We are not pleased with our top-line sales performance," said Jeffries. "Driving our top line volume is our biggest focus in 2004."

Meanwhile, a surge in the company's general, administrative and store operating expenses weighed on Abercrombie's earnings in the fourth quarter. Such costs outpaced sales, rising to 19.05% of revenue, up 1.58 percentage points from the year-ago period.

The increase in operating expenses was largely a result of the decline in same-store sales, said Seth Johnson, Abercrombie's chief operating officer. The company's fixed costs increased faster than its sales, he said.

The rise in operating costs outweighed an impressive jump in Abercrombie's gross profit margin. In the fourth quarter, Abercrombie posted a gross margin of 46.58% of sales, up 1.11 percentage points from the year-earlier period. Gross margin represents the difference between what a company charges customers for its goods and services and what it pays suppliers for them.

Abercrombie's gross margin increased due to a rise in the company's initial markup on its products, Johnson said.

Abercrombie also announced that it would start paying shareholders an annual cash dividend of 50 cents a share. The company will pay the first quarterly portion of that dividend -- 12.5 cents a share -- on March 30 to shareholders of record as of March 9.