Shares of Abercrombie & Fitch Co. tumbled on Wednesday after the retailer of preppy teen apparel reported third-quarter results that missed expectations due to higher costs and a slowdown in Europe.
After losing market share to cheaper competitors during the recession, Abercrombie & Fitch has focused on expanding internationally with flashy flagship stores in places like Milan and Paris and on closing underperforming stores in the U.S.
But it is facing challenges on two fronts, higher costs and the increasingly shaky economy in Europe. In a call with analysts, CEO Mike Jefferies said the company stood by its European expansion plans.
"Our European business, while slowing somewhat during the quarter, is very robust and healthy by any objective measure," he said. "If anyone is inclined to believe that a softening of our business in Europe this quarter in the face of severe macroeconomic headwinds is a major issue for our model, frankly, I think they are missing the forest for the trees."
Its shares dropped more than 14 percent in late morning trading.
Abercrombie reiterated that it plans to open 40 international mall-based Hollister stores during the year. About 25 have opened as of Oct. 29. It plans to open five international flagship Abercrombie & Fitch stores in 2011. It said it would open Abercrombie & Fitch flagship stores in Amsterdam and Munich in 2012, in addition to previously announced flagships opening in Hamburg and Hong Kong.
Meanwhile, high costs pressured results. The cost of goods sold was up 34 percent during the quarter. But the company did not raise prices, in order to drive sales in its U.S. stores.
"We chose to keep our average unit retail prices down in these stores, which, combined with double-digit average unit cost increases, puts significant pressure on our gross margins," Jeffries said.
He said the company likely would likely raise prices in the future, and not doing so "left dollars on the table," in the third quarter.
The New Albany, Ohio-based retailer's net income rose to $50.9 million, or 57 cents per share, for the three months ended Oct. 30. That compares with $50 million, or 56 cents per share, a year ago. Analysts polled by FactSet expected earnings of 72 cents per share.
Revenue rose nearly 22 percent to $1.08 billion from $886 million. Analysts expected revenue of $1.07 billion.
U.S. revenue rose 14 percent to $920.2 million. International sales rose 56 percent to $255.7 million.
Revenue in stores open at least one year, a key gauge of a retailer's performance, rose 7 percent, including a 4 percent gain at Abercrombie & Fitch, a 6 percent gain at Abercrombie kids stores and an 8 percent gain at surf-themed Hollister Co.
Shares fell $8.01, or 14.4 percent, to $47.69 in late morning trading after falling as low as $46.69 earlier in the session. The stock had been down 3 percent since the beginning of the year.
Stock fell in the broader market as oil topped $100 a barrel for the first time since July and concern about Europe's debt crisis lingered. The Dow fell 121 points in morning trading.