Abercrombie & Fitch Sees Stock Pullback Despite Strong Q3 Results

Abercrombie & Fitch (NYSE: ANF), known for its casual clothing and footwear, experienced a decline of about 5% on November 26th, while the S&P 500 index increased by 0.6%. Conversely, American Eagle Outfitters (NYSE: AEO) also faced a drop of 4%, bringing its stock to around $18. This fall in Abercrombie’s stock comes despite recent strong third-quarter earnings (ANF’s FY’23 concludes on February 3, 2024), reporting a 16% growth in comparable sales and a 37% rise in earnings per share. The company also raised its full-year guidance, indicating it is managing to thrive even with economic challenges. Growth was broad-based, with gains across key markets, brands, and customer demographics, driven by strong consumer demand and effective promotions.

What Caused the Drop?

Several factors might explain the stock’s downturn. First, while comparable sales grew by 16% in Q3, this is a decrease from previous quarters with 21% growth in Q1 and 18% in Q2. Moreover, operating margin decreased from 15.5% in Q2 to 14.8% in Q3. Despite solid performance shown in the quarter, there are concerns about a slower growth trajectory moving forward. Additionally, Abercrombie faces challenges related to shipping and potential tariff issues.

Valuation and Future Projections

Currently, ANF’s stock price is $147, approximately 8% lower than Trefis’ valuation estimate of $158. This estimate is based on an expected EPS of $10.54 and a P/E ratio of 15.0x for fiscal year 2024. Trefis forecasts revenues of $4.9 billion for FY 2024, reflecting a 15% increase year-over-year. Even with positive news, the enthusiasm surrounding ANF’s financial performance and raised FY2024 guidance seems tempered.

Stock Performance Overview

Over the past three years, ANF’s stock performance has fluctuated significantly, showing volatility compared to the S&P 500. Annual returns were 71% in 2021, -34% in 2022, and 285% in 2023. In contrast, Trefis’ High Quality (HQ) Portfolio has consistently outperformed the S&P 500 each year, demonstrating less volatility.

The Road Ahead for Abercrombie

Given the current economic uncertainties, including discussions on rate cuts and international conflicts, analysts ponder whether ANF will replicate its 2022 experience of underperforming the S&P 500 in the next year, or if it will make a recovery.

Strong Q3 Financials

In Q3, Abercrombie reported a robust sales increase of 14% year-over-year, reaching $1.2 billion, largely supported by a 16% jump in comparable sales. Successful pricing strategies and product range selections contributed significantly to this growth. Specifically, Hollister’s revenue rose by 14%, while the Abercrombie brand itself saw a 15% gain in Q3, thanks mainly to a solid student demographic and growth in the women’s category. This strong sales performance, along with an increase in gross profit margin by 20 basis points to 65.1%, resulted in an operating margin growth of 170 basis points year-over-year to 14.8%. As a result, EPS grew to $2.50 from $1.83 one year ago.

A Record Performance for Hollister

Hollister achieved its sixth consecutive quarter of sales growth, and Abercrombie announced it expects the Abercrombie brand to eventually outperform Hollister. The company raised its full-year guidance, projecting a strong holiday season with anticipated sales growth of 5% to 7% in Q4. It now estimates annual sales growth of 14%-15%, up from the previous forecast of 12%-13%, and anticipates an operating margin around 15%.

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

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.