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Abercrombie Buttons Up Guidance


Drop in same-store sales clouds forecast.

On Friday, Abercrombie & Fitch (ANF) released second-quarter earnings of $77.8 million or $0.87 per share, a slight dip from the $81.3 million or $0.88 per share it earned in the same period last year. Net sales in the quarter, which ended August 2, rose 5%, to $845.8 million.

Though earnings did come in $0.02 north of analysts' expectations, Abercrombie's same-store sales and forward-looking guidance were sobering. While sales increased 5% at the Ohio-based company's flagship A&F stores, its other brands suffered significant losses: Hollister declined 9%, abercrombie (its children's line) declined 11%, and Ruehl, its smallest brand, was hit hardest, with sales declining a whopping 22%. Company-wide, same-store sales fell 4% as compared with a 2% drop in the same period last year.

Management, citing the widespread slowdown in consumer spending, now calls for the company to earn between $4.95 and $5 per share for fiscal year 2008, below the $5.36 per share Wall Street was projecting.

CEO Mike Jeffries said, however, that Abercrombie would not offer promotions or discounts, as other retailers have done; instead, it may even raise prices, and is looking to international expansion to enable long-term growth.

Despite this, you can expect the sell side to begin busily lowering estimates to reflect management's guidance, which could incite some shareholders to bail on the stock.

I want to stress, however, that I'm not bearish on Abercrombie, despite its disappointing comp number and downgraded outlook. It's important to note that the company currently trades at 10.6 times the forecast of $4.95 per share, and is expected to earn $5.60 per share next year.

It also has some pretty some strong margins. Gross margins for the quarter came in at 70.1%, reflecting Jeffries' willingness to raise prices on some items and to offer no new markdowns, despite the dour economic climate.

Put simply: While the stock could take some punishment in the near term, over the long haul these guys should fare just fine.

Abercrombie closed at $52.59, up $0.02 or 0.04%.
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