The Ebbs and Flows of the Retail Sector; Here's some Color on the Deleveraging Effects Abercrombie & Fitch is Enduring

NEW YORK (Dow Jones)--Abercrombie & Fitch Co. (ANF) will use lower prices as part of an arsenal that includes incorporating in-step fashions and more international expansion to battle out of the recession. "Consumer spending patterns domestically continue to be dictated by cost and value propositions and this is clearly a headwind for our premium brands," Chief Executive Michael Jeffries said during a conference call to discuss the retailer's second quarter results, which came in a bit better than expected. The pressure is forcing Abercrombie & Fitch to do something it is loathe to: step up efforts to offer lower prices after having spent much of the recession clinging to a more premium-cost approach. "We are planning to deliver greater reductions in [average unit retail prices] for the fall season, but we will continue to review pricing on an ongoing basis," Jeffries said. Abercrombie & Fitch has also stumbled when it comes to offering compelling merchandise. "We have admittedly missed some other fashion opportunities that drove the business in the spring," Jeffries said. "We feel like we have corrected these fashion misses," by adding in-demand clothing in time for back-to-school and holiday buying. Jefferies reiterated that Abercrombie & Fitch feels its future is tied to international expansion. The retailer plans to open three international flagship stores this fiscal year as it cut its fiscal-year capital spending target by $15 million to $185 million. As Abercrombie & Fitch continues heading overseas, it has to rebuild cache with consumers, said Brian Sozzi, retail analyst at Wall Street Strategies. "Brand perception has taken a hit as consumers cry afoul regarding inflated prices at all divisions," Sozzi said. "Value in discretionary apparel purchases will be predominant for back to school and the holidays, and consequently, Abercrombie & Fitch's sales will continue to suffer." Abercrombie & Fitch swung to a fiscal second-quarter loss on continued drops in sales and margins. Its 2 cent a share loss, excluding charges, was better than the 3 cents analysts expected, while sales came in at $648.5 million, above projections for $647.8 million. Shares were recently up $1.28, or 3.7%, to $34.10. The teen-apparel retailer has been increasingly shedding its no-markdown approach after seeing same-store sales drop sharply month after month as it looks to clear inventory. Abercrombie & Fitch has consistently been among the poorest performers when it comes to comparable-store-sales declines, with July, the last month of the second quarter, showing a 28% drop. In June, the company said it would close its 29 Ruehl stores and related operations by the end of the year. The high-end Ruehl business had been posting slumping results. Gross margin during the second quarter fell to 66.5% from 70.1% on a higher markdown rate. Inventories declined 13% from Jan. 31. The company had come under fire for keeping inventories at levels similar to those before the economic slump. -By Karen Talley, Dow Jones Newswires; 212-416-2196; Karen.Talley@dowjones.com (Kerry Grace Benn contributed to this article.) Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=esFzrxWK1%2FxTjn70ludcgQ%3D%3D. You can use this link on the day this article is published and the following day. (END) Dow Jones Newswires August 14, 2009 12:04 ET (16:04 GMT) Copyright (c) 2009 Dow Jones & Company, Inc.- - 12 04 PM EDT 08-14-09