Abercrombie & Fitch Falls Out of Fashion in Q3

There was no strutting down the runway this quarter for teen retailer Abercrombie & Fitch (NYSE: ANF  ) , which reported disappointing third-quarter earnings results before the opening bell.

For the quarter, Abercrombie & Fitch – which also owns Hollister – reported a 12% decline in sales to $1.033 billion from $1.17 billion in the year-ago period as it reported a GAAP loss of $0.20 per share, dragged down primarily by a one-time charge to close its Gilly Hicks stores. When this one-time cost is removed, Abercrombie & Fitch delivered EPS of $0.52, which was modestly ahead of Wall Street's expectations.

Despite the adjusted earnings beat, there wasn't much to cheer about. Same-store sales, which is a truer measure of retail performance as it strips out the addition of new locations, fell a whopping 14% overall, highlighted by a 14% drop in the U.S. and a 15% drop in its international markets. The one bright spot was Abercrombie's direct-to-consumer (i.e., online and catalog) comparable-store sales, which rose 11% year-over-year.

By brand it was much the same story, with comparable-store sales for Abercrombie & Fitch and Hollister falling 13% and 16%, respectively (Hollister sales make up 52% of A&F's total revenue), while Abercrombie Kids saw a smaller decline of just 4%.

Looking ahead, Abercrombie & Fitch is forecasting a low double-digit same-store sales decline in the fourth quarter and offering up full-year EPS guidance of $1.40-$1.50. The outlook also "assumes significant gross margin rate erosion in the fourth quarter with gross margin rate approximately flat year over year on a full year basis." In other words, expect big discounts to drive merchandise off the shelves this holiday season.

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