Why is Abercrombie’s Stock Falling Despite An Upbeat Q3?

Abercrombie & Fitch (NYSE: ANF), a specialty retailer selling casual clothing and footwear, fell around 5% on Tuesday, 26th November, as compared to a 0.6% increase in the S&P 500 index. In comparison, ANF’s peer American Eagle Outfitters (NYSE: AEO) has seen its stock down 4% to around $18 on the same day. Notably, though, the decline in the company’s stock comes on the heels of strong third-quarter results (ANF’s FY’23 ended on February 3, 2024) with a 16% growth in comparable sales, 37% growth in earnings per share, and raised full-year guidance – suggesting the company continues to outperform in a challenging economic environment. The company’s sales growth was widespread and diversified, with gains in all key markets, brands, and customer groups, fueled by strong customer demand and effective promotion management.

But why did the stock decline? There could be several reasons for the sell-off. Firstly, the company’s comparable sales were lower sequentially compared to a 21% growth in Q1 2024, 18% growth in Q2, and 16% in Q3. Additionally, the retailer’s operating margin has been down sequentially from 15.5% in Q2 to 14.8% in Q3. In other words, while the company expects to remain profitable, it is forecasting a slower growth rate. Although the company delivered a robust performance, it continues to confront complexities in the ever-changing shipping landscape and potential tariff-related headwinds.

That said, ANF’s current price of $147 is about 8% below Trefis’ estimate for Abercrombie & Fitch’s Valuation at about $158. This is based on a $10.54 expected EPS and a 15.0x P/E multiple for the fiscal year 2024. We forecast ANF Revenues to be $4.9 billion for the fiscal year 2024, up 15% y-o-y. So, despite the good news, 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.

The growth in ANF stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 71% in 2021, -34% in 2022, and 285% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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 around rate cuts and multiple wars, 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 recovery?

In Q3, ANF grew sales by a strong 14% year-over-year (y-o-y) to $1.2 billion, driven by a 16% 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 14% gains and the namesake brand saw 15% y-o-y growth in Q3 – 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 20 basis points to 65.1% – led to an operating margin growth of 170 basis points y-o-y to 14.8%. Consequently, the company’s  EPS came in at $2.50 compared to $1.83 a year ago.

It is worth mentioning that while Abercrombie continued its impressive multi-quarter growth trend, Hollister delivered a sixth 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. The company raised its full-year guidance and said it is expecting a strong holiday shopping season – anticipating sales growth of 5% to 7% in Q4. For the full year, it now expects sales to grow 14%-15% from initial guidance of 12% to 13%, and operating margin in the range of 15%.

[1] Returns as of 11/27/2024
[2] Cumulative total returns since the end of 2016

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