Sexy retailer Abercrombie & Fitch(NYSE: ANF) reported expectation-beating fourth-quarter results yesterday after market close. The company capped off a difficult year filled with a seemingly endless supply of controversy.

From naked college kids hawking clothes in its juicy catalog Quarterly, to thongs for young girls sold in their children's stores, to racial missteps with some of its T-shirts, Abercrombie & Fitch is undoubtedly happy to breeze into fiscal 2003.

Despite (or perhaps because of) all the controversy, the retailer pulled off a solid quarter and year. Sales for Q4 rose 14.6% to $534.5 million. For the entire year, revenues jumped 17% to $1.6 billion. The only catch remains same-store sales. They were off 4% for the quarter and 5% for the year.

Back in January, Abercrombie raised earnings guidance for its fourth quarter to $0.86 to $0.88 a share. Yesterday, it reported $0.93 a share, ahead of revised expectations by three cents and last quarter's results by 19%. It earned $194.9 million for the year. That's 15.5% ahead of 2001's $168.7 million.

Its balance sheet also looks as fresh as one of its nubile models. Accounts receivables are nearly half of what they were last year. Inventory levels are up 32%, which might be cause for concern given the 17% sales growth, but the company has an explanation. Last year, it was left with too little inventory after Christmas and going into spring. It's correcting that mistake this time around so as not to lose sales.

While Abercrombie should certainly be congratulated on a great quarter and year, it faces some challenges. First, it needs to improve its flagship store's men's business. For the past several quarters, the women's side has been outperforming the men's. Hopefully, its spring mix will draw 'em in like frat boys to a kegger.

Also, the retailer has been squeezing every possible part of its business over the last year for cost savings. It's cut down on the hours worked by its well-outfitted employees. It's shrinking its fulfillment costs for the online business and reducing its sourcing costs. However, the company admits it's just about eked out all the available savings. Given this, Abercrombie won't be able to rely on this strategy as much in the coming year to strengthen its bottom line.

Shares have risen dramatically since Abercrombie raised its guidance back in January. Assuming the company continues executing and meeting its challenges head-on, it wears its P/E of around 15 well.

LouAnn Lofton owns shares of Abercrombie & Fitch.