Abercrombie’s Cost Cuts Mask Some Troubling Numbers

The teen retailer’s stock jumps after exceeding analysts’ low expectations for the fourth quarter, but its stores are still struggling mightily in the U.S. and Europe.

On the surface, Abercrombie & Fitch seems to have aced earnings today — cost cuts helped it crush analysts’ expectations for adjusted profit in the fourth quarter, sending shares soaring by more than 10%. The announcement of a big stock buyback didn’t hurt.

But looking more closely at the numbers, a less rosy picture emerges. For one, sales at stores open a year or more plummeted 16% in the quarter, the ninth straight quarterly plunge, and 16% for the year, with Abercrombie anticipating another decline “in the high single digits” for 2014. Even with the benefit of a booming online business and sales from new stores, annual revenue shrank by about 9% to $4.12 billion from $4.51 billion, in a year that was admittedly difficult for teen retailers across the board.

Chief Executive Officer Mike Jeffries, in a conference call with analysts, cited “a challenging retail environment, particularly in the teen space,” adding that “the significant decline in store traffic that began in July continued through the holiday season and as yet has shown no sign of abating.”

Still, Abercrombie and Hollister store sales in the U.S. have been falling for longer than that, with many contending that the pricey namesake brand in particular has lost its luster with teens. While the CEO told analysts in November 2012 that “the notion that our U.S. business has been in decline is just nonsense,” the company has closed 220 American stores since 2010, with plans to shutter another 60 to 70 this year. Even European locations are faltering due to high unemployment. In the meantime, Abercrombie says business in Asia, especially China, is booming, and it plans to open additional namesake and Hollister stores there and in the Middle East. The retailer has roughly 1,000 stores, 843 of which are in America.

When factoring in pre-tax charges mostly tied to shuttering the Gilly Hicks teen lingerie chain and revaluing 97 stores, Abercrombie’s net income for the year was $54.6 million from $237 million in 2012. The company’s adjusted net income was much smaller than last year, but not as bad: $150.6 million for 2013 compared with $241.6 million in 2012.

Still, Abercrombie says it has big plans for improving business this year, from hiring presidents for its namesake and Hollister chains to further differentiate the two brands to improving fashions on the women’s side of the business and lowering prices. Executives didn’t discuss the company’s battle with hedge fund Engaged Capital, which just nominated five new directors to Abercrombie’s board and has been pushing for the ouster of 69-year-old Jeffries.

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