Abercrombie Reports Strong Q2 Beat, Yet Its Stock Tanks 17%: What’s Going On?

Abercrombie & Fitch (NYSE: ANF), a specialty retailer selling casual clothing and footwear, fell around 17% on Wednesday, 28th August, as compared to a 0.6% decline in the S&P 500 index. In comparison, ANF’s peer American Eagle Outfitters (NYSE: AEO) has seen its stock down 4% to around $22 on the same day. Notably, though, the sharp decline in the company’s stock comes on the heels of better-than-expected second-quarter results (ANF’s FY’23 ended on February 3, 2024) with an 18% growth in comparable sales, 127% growth in earnings per share, and raised full-year guidance – suggesting the company continues to outperform in a challenging economic environment.

Why? Several reasons for the sell-off. Firstly, the company’s Q2 gross margin of 64.9% came in below market expectations of 65.4%. The company’s comparable sales also came in lower sequentially compared to a 21% growth in Q1 2024. Additionally, the retailer is projecting an operating margin in the range of 13-14% for the upcoming Q3 – down from 15.5% in the currently reported second quarter. In other words, while the company expects to remain profitable, it is forecasting a slower growth rate.

That said, ANF’s current price of $138 is about 10% below Trefis’ estimate for Abercrombie & Fitch’s Valuation at about $154. This is based on a $9.86 expected EPS and a 15.6x P/E multiple for the fiscal year 2024. We forecast ANF Revenues to be $4.8 billion for the fiscal year 2024, up 13% y-o-y. That said, most of the exuberance in the company’s stock price surrounding ANF’s significantly higher financials this year and raised FY2024 guidance have been moderated.

ANF stock has seen extremely strong gains of 575% from levels of $20 in early January 2021 to around $138 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the increase in ANF stock has been far from consistent. Returns for the stock were 71% in 2021, -34% in 2022, and 285% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that ANF underperformed the S&P in 2022.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including H, WMG, and AMZN, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ANF face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

In Q2, ANF grew sales by a strong 21% year-over-year (y-o-y) to $1.13 billion, driven by an 18% growth in comparable sales across the company. The company benefited from good pricing management and the right product assortment. In terms of revenue, Hollister saw 17% gains and the namesake brand saw 26% y-o-y growth in Q2 – thanks to its strong student demographic and growth in its women’s business. A robust top-line growth, along with gross profit rate expansion of 240 basis points to 64.9% – led to an operating margin growth of 590 basis points y-o-y to 15.5%. Consequently, the company’s adjusted EPS came in at $2.50 compared to $1.10 a year ago.

It is worth mentioning that while Abercrombie continued its impressive multi-quarter growth trend, Hollister delivered a fifth consecutive quarter of sales growth. The parent brand has closed on the Hollister brand as the biggest revenue generator for the first time in FY’23. The company continues to expect the Abercrombie brand sales to outperform Hollister sales going forward. In the Q2 call, management raised guidance for FY’24. It now expects sales to grow 12-13% from initial guidance of +10%, and operating margin in the range of 14-15% versus initial guidance of +14%.

[1] Returns as of 8/29/2024
[2] Cumulative total returns since the end of 2016

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