Profit Jumps at Abercrombie

The teen-clothing retailer handily beats Wall Street's earnings forecast.
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Updated from 5:11 p.m. EDT

Abercrombie & Fitch

(ANF) - Get Report

didn't maintain the blistering sales pace it set last year in its first quarter, but the trendy teen-apparel chain posted a 39% jump in profits and easily topped Wall Street's earnings forecast.

The company said Tuesday it earned $56.2 million, or 62 cents a share, for the quarter, up from $40.4 million, or 45 cents a share, a year earlier. Analysts, on average, expected earnings of 54 cents a share, according to Thomson First Call.

Based on the results, the company raised its earnings outlook for the first half of fiscal 2006 to a range of $1.28 to $1.33 a share, up from its previously issued forecast of $1.23 to $1.28 a share. The results will include a charge of 8 cents a share from stock-option expensing. Wall Street anticipates first-half earnings of $1.26 a share, including stock option costs.

Shares of Abercrombie & Fitch were recently up $1.25, or 2%, to $61.50 in after-hours trading.

The company reported total sales of $657.3 million, up 20% from the year-ago period. Those results came on a same-store sales increase of 6% -- a strong number, but hardly on par with the company's consistent double-digit comps from last year. It recorded a 26% jump in same-store sales, or comps, for 2005.

"Although our results will continue to be measured against the growth we attained last year, I am confident that our brands are positioned to generate strong financial returns this year," said Abercrombie's chairman and chief executive, Michael Jeffries, in a statement.

Among the company's concepts, its flagship Abercrombie & Fitch chain was the laggard in terms of sales, with a 4% decline in comps for the quarter. The abercrombie kids chain saw a 30% same-store sales gain, while the Hollister chain chalked up a 13% increase.

The company's gross-profit rate for the quarter hit 65.4%, up 10 basis points from last year. Abercrombie attributed the higher rate to a slight improvement in initial markup combined with a slightly lower markdown rate. Stores and distribution expense, as a percentage of sales, decreased 130 basis points to 39.3%, while selling costs rose 130 basis points to 13.6% from 12.3%.

On a conference call, analysts voiced concerns about a 26% year-over-year increase in inventories, which some observers view as a glut in denim products left over from last year's spring denim craze. If that's the case, aggressive markdowns or even write-offs could potentially weigh on the company's profit margins.

"Our inventories are coming into line," Jeffries said. "We're becoming more efficient with our denim inventories as we go forward."

At the end of the quarter, the company operated 348 Abercrombie & Fitch stores, 161 abercrombie stores, 327 Hollister stores, and 10 RUEHL stores. By the end of the year, it plans to add 10 Abercrombie & Fitch stores, 70 Hollisters, 20 abercrombie stores and seven RUEHL stores.

Jeffries said the company's new flagship store on Fifth Avenue in Manhattan was making a "significant" contribution to its overall sales and strengthening the brand. He expects more such benefits when the company opens another flagship store at The Grove in Los Angeles in July.

Also, the company said it is discontinuing its Ezra Fitch brand, but it will still maintain the price points of those products under the Abercrombie & Fitch brand.

"Our customers have shown a commitment to the Abercrombie & Fitch brand," Jeffries said.