Abercrombie Studies Sturdy Q2 Beat, But Its Inventory Tanks 17%: What’s Going On?

Abercrombie & Fitch (NYSE: ANF), a specialty retailer promoting informal clothes and footwear, fell round 17% on Wednesday, twenty eighth August, as in comparison with a 0.6% decline within the S&P 500 index. As compared, ANF’s peer American Eagle Outfitters (NYSE: AEO) has seen its inventory down 4% to round $22 on the identical day. Notably, although, the sharp decline within the firm’s inventory comes on the heels of better-than-expected second-quarter outcomes (ANF’s FY’23 ended on February 3, 2024) with an 18% progress in comparable gross sales, 127% progress in earnings per share, and raised full-year steerage – suggesting the corporate continues to outperform in a difficult financial setting.

Why? A number of causes for the sell-off. Firstly, the corporate’s Q2 gross margin of 64.9% got here in beneath market expectations of 65.4%. The corporate’s comparable gross sales additionally got here in decrease sequentially in comparison with a 21% progress in Q1 2024. Moreover, the retailer is projecting an working margin within the vary of 13-14% for the upcoming Q3 – down from 15.5% within the at the moment reported second quarter. In different phrases, whereas the corporate expects to stay worthwhile, it’s forecasting a slower progress charge.

That mentioned, ANF’s present worth of $138 is about 10% beneath Trefis’ estimate for Abercrombie & Fitch’s Valuation at about $154. That is based mostly on a $9.86 anticipated EPS and a 15.6x P/E a number of for the fiscal 12 months 2024. We forecast ANF Revenues to be $4.8 billion for the fiscal 12 months 2024, up 13% y-o-y. That mentioned, many of the exuberance within the firm’s inventory worth surrounding ANF’s considerably greater financials this 12 months and raised FY2024 steerage have been moderated.

ANF inventory has seen extraordinarily robust positive aspects of 575% from ranges of $20 in early January 2021 to round $138 now, vs. a rise of about 50% for the S&P 500 over this roughly 3-year interval. Nevertheless, the rise in ANF inventory has been removed from constant. Returns for the inventory had been 71% in 2021, -34% in 2022, and 285% in 2023. As compared, 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.

Actually, constantly beating the S&P 500 – in good occasions and unhealthy – has been tough over current years for particular person shares; for heavyweights within the Shopper Discretionary sector together with H, WMG, and AMZN, and even for the megacap stars GOOG, TSLA, and MSFT. In distinction, the Trefis Excessive High quality (HQ) Portfolio, with a group of 30 shares, has outperformed the S&P 500 annually over the identical interval. Why is that? As a bunch, HQ Portfolio shares offered higher returns with much less danger versus the benchmark index; much less of a roller-coaster journey as evident in HQ Portfolio efficiency metrics. Given the present unsure macroeconomic setting with excessive oil costs and elevated rates of interest, may ANF face an analogous state of affairs because it did in 2022 and underperform the S&P over the following 12 months – or will it see a robust soar?

In Q2, ANF grew gross sales by a robust 21% year-over-year (y-o-y) to $1.13 billion, pushed by an 18% progress in comparable gross sales throughout the corporate. The corporate benefited from good pricing administration and the fitting product assortment. By way of income, Hollister noticed 17% positive aspects and the namesake model noticed 26% y-o-y progress in Q2 – because of its robust pupil demographic and progress in its girls’s enterprise. A strong top-line progress, together with gross revenue charge enlargement of 240 foundation factors to 64.9% – led to an working margin progress of 590 foundation factors y-o-y to fifteen.5%. Consequently, the corporate’s adjusted EPS got here in at $2.50 in comparison with $1.10 a 12 months in the past.

It’s price mentioning that whereas Abercrombie continued its spectacular multi-quarter progress development, Hollister delivered a fifth consecutive quarter of gross sales progress. The dad or mum model has closed on the Hollister model as the largest income generator for the primary time in FY’23. The corporate continues to anticipate the Abercrombie model gross sales to outperform Hollister gross sales going ahead. Within the Q2 name, administration raised steerage for FY’24. It now expects gross sales to develop 12-13% from preliminary steerage of +10%, and working margin within the vary of 14-15% versus preliminary steerage of +14%.

[1] Returns as of 8/29/2024
[2] Cumulative complete returns for the reason that finish of 2016

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The views and opinions expressed herein are the views and opinions of the creator and don’t essentially mirror these of Nasdaq, Inc.