Investing

Abercrombie & Fitch Just Blew Out Earnings and is Up 153% Over the Past Year: Is it a Buy?

Chris MacDonald

Published: August 29, 2024 10:41 am

Abercrombie & Fitch (NYSE:ANF) raised its annual sales forecast after exceeding Q2 revenue expectations. However, shares of ANF stock fell 17% in today’s session as investors anticipated a larger guidance increase. Despite an 89% stock surge this year, market analysts found the company’s sales outlook impressive, given the challenging retail environment. 

The company’s success was driven by revamping its merchandise, including dressier apparel and cargo pants, attracting fashion-conscious shoppers. While other retailers, like Macy’s and Home Depot, lowered their sales forecasts due to weak demand, Target and Walmart saw strong results as consumers sought budget-friendly options.

Need to Know News:

• Abercrombie & Fitch raised its full-year sales forecast after a 21% Q2 revenue increase, with record sales and improved profitability.
• Despite strong results, ANF stock dropped 17% as investors expected a bigger guidance increase, questioning sustained growth at current valuations.
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With a shifting market and consumer environment, it all boils down to one question for Abercrombie & Fitch: is the stock a buy?

Let’s Look At Its Strong Sales

Abercrombie & Fitch credited its strong brand portfolio for achieving a record second-quarter sales of $1.1 billion, a 21% increase from the same quarter the year prior. The retailer’s success followed record first-quarter results, driven by fewer promotions and clearer brand identities. CFO Scott Lipesky reported that second-quarter marketing spend aligned with expectations, totaling about 4.5% of sales, slightly down from the first quarter’s 5%.

Abercrombie’s net income for the quarter ending August 3 rose to $133.2 million from $56.9 million the previous year, surpassing analyst expectations of $2.22 per share. Operating income increased to $176 million from $90 million last year. Additionally, net sales grew 21% to $1.134 billion, exceeding estimates. Abercrombie’s sales, including Abercrombie Kids, surged 26%, while Hollister and Gilly Hicks saw a 17% rise. The company’s Americas region’s net sales grew by 23%, and the EMEA division saw a 16% increase, with overall comparable sales up 18%.

CEO Fran Horowitz reported strong second-quarter performance, with better-than-expected sales growth and profitability. The company achieved a 15.5% operating margin and record operating income of $176 million. Despite economic uncertainty, Abercrombie raised its full-year outlook, now expecting 12% to 13% net sales growth, up from 10%, and an operating margin between 14% and 15%. Horowitz emphasized the company’s commitment to disciplined execution, focusing on inventory, expenses, and long-term investments in marketing, digital, technology, and stores to support sustainable, profitable growth.

Post-Earnings Plunge

Abercrombie & Fitch’s stock is still up considerably over the past year, surging more than 150% (inclusive of Wednesday’s drop). However, a drop of roughly 20% at today’s lows suggests that many had expected to see even rosier numbers reported, with a forward outlook that came close to the previous growth the company has seen.

Few can contest that Abercrombie’s management team is taking a measured approach to its recent success. This market is one that’s becoming more fragile, with cracks appearing within certain consumer groups. And while the company did put forward low-double-digit sales growth expectations for the third quarter, sometimes great isn’t good enough for some investors.

Wednesday’s decline marked Abercrombie’s largest daily decline in two years. Analysts attributed the drop to investor expectations, considering the retailer’s recent outperformance and raise bar of expectations. Now trading at 16.7-times forward earnings, above the retail sector’s average of 14 times, some may also view the stock as expensive. This high valuation is the result of the market setting lofty expectations, making it difficult for the company to meet the whisper numbers on the Street.

ANF Stock Still Looks Like a Buy

William Blair analyst Dylan Carden warned that Abercrombie could face margin pressure if sales growth normalizes, with rising costs and competitive pricing potentially impacting margins. Despite this, Dana Telsey from Telsey Advisory Group views the company’s performance positively, noting that a beat and raise is impressive given the broader retail challenges. She rates Abercrombie as Outperform with a $208 target.

Moreover, other analysts remain positive with respect to Abercrombie’s recent report. Jefferies’ Corey Tarlowe rated the stock a Buy with a $215 target, while CFRA upgraded it from Hold to Buy, raising the target to $198. CFRA’s revised outlook reflects confidence in Abercrombie’s strong brand momentum and digital marketing success, with a forward price-earnings ratio of 17.2-times. The company’s robust balance sheet also positions it well for potential share repurchases.

Following CFRA’s upgrade, Abercrombie & Fitch displayed a strong outlook with notable growth. Revenue increased 20.01% year-over-year to $4.47 billion, and quarterly revenue rose 22.1% in Q1 2023. The company also achieved a high gross profit margin of 64.07%. These factors should provide investors with enough reason to buy ANF stock, or at least hold steady, following this report.