Abercrombie shares soar as inventory issues wane

Teen clothing retailer Abercrombie & Fitch Co stunned investors on Wednesday with unexpectedly improved third-quarter results and a full-year outlook that exceeded Wall Street forecasts, sending shares up as much as 30 percent.

The company got a handle on excess inventories that had sparked a round of discounting that worried investors. It also had pockets of sales strength in places like Scandinavia and China that helped revenue exceed expectations. Even troubled markets like Spain were not as bad as expected.

Abercrombie & Fitch was "being highly disciplined" with inventory management, and was working to ensure sales growth outpaced that of inventory, Chief Executive Mike Jeffries said on a call with analysts Wednesday.

The company ended the quarter with total inventory that was 21 percent lower than a year ago.

Shares of the company, which hired Goldman Sachs Group Inc in September to help ward off pressure from investors, were up 28 percent at $40 in afternoon trading on the New York Stock Exchange. The stock has lost about a third of its value since hitting $57.56 a year ago.

Roxanne Meyer, an analyst at UBS Securities, said the rally in the stock was due to covering of short positions by traders.

According to Markit's Data Explorers, about 28 percent of the shares available for short-selling were being borrowed for this purpose. That's more than the market average of about 8 percent, though it is down from a peak of more than 70 percent in mid-August.

Not all shares of a company's stock are available for shorting, so a high rate of utilization suggests heavy interest among short-sellers. Investors who believe a stock is going to fall sometimes bet on this by borrowing the stock and selling it, also known as "shorting."

Aeropostale Inc shares also benefited, rising 6 percent at $13.82 Wednesday morning on the New York Stock Exchange. Aeropostale competes on price with Hollister stores, which are also owned by Abercrombie.

Meyer said Wall Street "will assume Abercrombie's cleaner inventory gives Aeropostale more breathing room from Hollister's discounting." But she said that despite the encouraging trends in Abercrombie's comparable sales and margins, she was "neutral" on the stock as it seeks clarity in improving fashion.

Inventory management, or balancing orders with demand, has been a major concern for Abercrombie. In recent quarters, it has been compelled to offer discounts to its teenaged clientele who had held back on purchases.

In the third quarter, Abercrombie sales grew 9 percent to $1.17 billion. Markets like Asia, Scandinavia, Spain and Belgium did well, or not as bad as expected, resulting in a 37 percent rise in international sales.

CEO Jeffries attributed the pick up in sales to inventory flow "getting back on track."

"I think that international stores benefited, as did U.S. stores, from flowing new product. That was really our problem in the second quarter when we were in the defensive posture and did not flow product appropriately," Jeffries said.

The fact that the company was able to rein in excess merchandise bolstered confidence that Abercrombie will be able to keep up the cost benefits it saw this quarter, said Rahul Sharma, founder and managing director of retail consultancy Neev Capital.

Bloated inventories encourage price discounts, eroding profit margins.

CEO Jeffries also said the company was working on shortening the lead time between placing orders to manufacturers and getting them in stores, and would focus on current street and runway trends for its merchandise line.

Over the past year, sales at Abercrombie & Fitch have dropped in a segment dominated by so-called fast-fashion retailers - rivals with a quicker turnover of inventory and styles, such as American Eagle Outfitters and Gap Inc , or Forever21, which offers affordable clothing for more seasons.

Abercrombie has moved to curb dwindling sales by boosting sourcing from the United States and Central America, and delaying expansion in troubled European markets.

The retailer expects to earn $2.85-$3.00 a share for the full year. Analysts, on average, expected the company to earn $2.48 a share, according to Thomson Reuters I/B/E/S.

Same-store sales for the third quarter, or sales at established stores open at least a year, fell 3 percent, an improvement over the 10 percent drop in the second quarter.

The company forecast a mid-single-digit drop in same-store sales in the fourth quarter.

The relatively improved performance doesn't signal the end of Abercrombie's troubles, analyst Brian Sozzi of NBG Productions said.

"I don't believe Abercrombie is suddenly the share winner in teen apparel land ... (and I) wonder about sustainability of the story and whether they can become trends," he said, noting that globally, the comparable sales at Abercrombie's flagship locations were "quite poor."

For the third quarter ended Oct. 27, Abercrombie earned $71.5 million, or 87 cents a share, compared with $50.9 million, or 57 cents a share, in the same quarter last year. Analysts were expecting earnings of 59 cents a share. (Reporting by Nivedita Bhattacharjee in Chicago and David Gaffen in New York; Editing by Bernadette Baum and David Gregorio)