Strong Quarter for Abercrombie

The teen-clothing chain says its blistering sales growth won't be sustained.
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Updated from 5:47 p.m. EST

Wall Street teen-retailing star

Abercrombie & Fitch

(ANF) - Get Report

delivered an impressive 58% increase in earnings for its holiday quarter Tuesday, but the company threw some cold water on expectations for 2006.

The apparel chain reported net income of $164.6 million, or $1.80 a share, for the fourth quarter, up from the $104.3 million, or $1.15 a share, a year earlier. The results beat analysts' already lofty expectations for earnings of $1.78 a share, based on an average estimate compiled by Thomson First Call.

On its top line, the company's net sales increased 40% to $961.4 million on a same-store sales gain of 28%. At its flagship chain, sales rose 19% to $473.6 million on comps up 18%. Sales at its children's chain, abercrombie, jumped 57% to $121.8 million, while same-store sales surged 59%; at the Hollister chain, sales rose 71% to $358.9 million, with comps up 34%.

"All three of their brands are doing absolutely awesome," says Christine Chen, analyst with Pacific Growth Equities. "They are the coolest kid in town. They look better than anyone else does in their space, in the mall. If there's any teen retailer that's well positioned for 2006, it's them."

Chen doesn't own shares of Abercrombie, and her firm has no investment banking relationship with the company.

Looking ahead, the retailer said its blistering sales pace, which included a 33% gain in January comps, won't be sustained.

"The strong comparable store sales growth in January was due to a continuation of strong sales momentum, gift-card redemptions, and the benefit of unseasonably warm temperatures," Abercrombie said. "Consequently, the company believes that while it can sustain positive comparable store sales increases, the increases will not be at the level reported over the past 13 months."

For the first half of fiscal 2006, Abercrombie predicts earnings of $1.23 to $1.28 a share, including a one-time charge of 8 cents a share. Wall Street analysts, on average, were expecting earnings of $1.33 a share.

Another concern on Wall Street stemmed from Abercrombie's reported 59% rise in inventories per square foot from a year earlier. Fears still linger among investors that a variety of teen retailers will eventually be forced to take large writedowns on their burgeoning denim inventories after an aggressive buying binge.

"We're aware of the controversy," said Abercrombie's chairman and chief executive, Michael Jeffries, on a conference call with analysts. "We remain comfortable with our inventory levels."

Chen says the inventory number showed some improvement from Abercrombie's third-quarter results, but she acknowledged that it remains a chief concern.

"Investors continue to be very nervous about their inventories," Chen says. "If they keep comping what they've been comping, it's nothing to worry about because they still have momentum. If comps should drop precipitously and we start to see marddowns, then there might be reason to worry.

The company said it expects 2006 capital expenditures to total $405 million to $415 million, with around $260 million of that used to build new stores. The company plans to increase gross square-footage by approximately 11% for the year through the addition of 64 Hollister stores, 19 abercrombie stores, 12 Abercrombie & Fitch stores and eight RUEHL stores.

In after-hours trading, shares of Abercrombie recently were down $1.78, or 2.6%, to $67.